India’s Deposit Insurance latest Overview
India’s deposit insurance system plays a vital role in safeguarding the savings of millions. With a fund close to Rs 2 lakh crore, it stands as the third-largest globally. However, the coverage it provides is limited. Currently, only 46.3% of bank deposits are insured due to a cap of Rs 5 lakh on insurance coverage. This places India in the eighth position worldwide in terms of deposit coverage. Recent events have reignited discussions about the adequacy of this insurance, particularly in light of the recent moratorium on the New India Cooperative Bank by the Reserve Bank of India (RBI). Senior citizens, in particular, are raising concerns about the safety of their life savings.
The Current State of Deposit Insurance in India
The Deposit Insurance and Credit Guarantee Corporation (DICGC) oversees India’s deposit insurance scheme. The current cap of Rs 5 lakh was established in 2020, following a series of banking crises that led to significant deposit withdrawals. Prior to this, the coverage had remained unchanged for nearly three decades. The DICGC aims to protect depositors in case of bank failures, but the limited coverage raises questions about its effectiveness.
Most deposits in India are held in public sector banks or systemically important banks, which are generally considered stable. However, a significant portion of insured deposits is concentrated in cooperative banks, where over 90% of customers are fully covered based on the number of accounts held. This situation creates a false sense of security for many depositors, especially in light of recent banking challenges. The recent moratorium on the New India Cooperative Bank has highlighted the vulnerabilities within the system and the need for a more robust insurance framework.
Calls for Increased Coverage and Differential Insurance
In response to the recent banking crisis, there have been increasing calls for raising the deposit insurance coverage limit. Senior citizens, who often rely on their savings for retirement, are particularly vocal about the need for change. They argue that the current cap does not adequately protect their life savings, especially in times of financial instability.
RBI Deputy Governor M Rajeshwar Rao has suggested a differential level of deposit insurance. This would involve providing full coverage for specific segments, such as small depositors and senior citizens. Rao emphasized the importance of periodically revising the premiums of deposit-taking institutions to ensure that the insurance scheme remains relevant and effective. He proposed examining the economic viability of a targeted insurance approach that would better protect vulnerable depositors.
Global Comparisons and Future Directions
When compared to global standards, India’s deposit insurance coverage appears lacking. The insured deposit ratio varies significantly across countries. For instance, Belgium boasts an impressive 71% coverage, while Turkey lags behind at 21.5%. On average, deposit insurers worldwide cover around 41% of eligible deposits, leaving a substantial portion uninsured.
In India, the uninsured deposits to assessable deposits ratio (UIDR) has remained below 80% as of March 31, 2024. This aligns with the “80/20” rule, which suggests that the insured deposits ratio should be above 20%. The UIDR was below 50% for nearly four decades, indicating a long-standing issue with deposit insurance adequacy. As of the latest reports, the UIDR stands at 56.9%, which is comparable to the global median.
Moving forward, it is crucial for Indian policymakers to reassess the deposit insurance framework. Increasing the coverage limit and exploring targeted insurance options could enhance depositor confidence and financial stability. As the banking landscape continues to evolve, so too must the mechanisms designed to protect depositors.
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