A periodical upward revision of the deposit insurance coverage limit may be warranted, taking into account multiple factors such as growth in the value of bank deposits, economic growth rate, inflation, and increase in income levels, according to RBI Deputy Governor M Rajeshwar Rao.

He also observed that the possibility of economic viability of an alternate targeted insurance approach with full coverage for certain sections of the customers like small depositors, senior citizens etc. or pool deposits of smaller depositors could be examined based on a careful evaluation of the constructs, costs and benefit of such an approach.

“Today we count India to be amongst the fastest growing large global economies and this healthy growth rate is expected to continue in the near future,” he said.

“A growing and formalizing economy can naturally be expected to see a sharp increase in both primary and secondary bank deposits, driving a wedge between the desirable insurance reserve requirement and the available reserve,” Rao said in his valedictory address at the recent IADI Asia-Pacific Regional Committee International Conference 2024 at Jaipur.

At present, a limited coverage option is adopted in India with uniform deposit insurance coverage limited to an amount of ₹5 lakh per depositor of each insured bank.

The last time that the deposit insurance cover was increased was in 2020. It was upped five times to Rs 5 lakh with effect from February 4, 2020. Simultaneously, the insurance premium was increased to 12 paise per annum per ₹100 of deposit with effect from April 1, 2020, from 10 paise earlier.

The Deputy Governor noted that a periodical upward revision of the deposit insurance coverage limit means that the deposit insurer has to be mindful of the additional funding and needs to work out suitable options to meet the same.

Products: greater innovations, newer risks

“We also need to recognise that with greater innovations in product offerings by banks newer risks which can impact deposit growth, the demand for higher coverage for deposits, risk-based Premium would be a better option for the deposit insurer to ensure robustness of its finances and also enhance its capability to operate in changed financial milieu,” Rao said.

It is therefore important for deposit insurers to carefully examine the option of adopting risk-based deposit insurance cover.

Insurance cover for digital products

The Deputy Governor emphasised that even as digital products become more pervasive, there would be a need to consider whether coverage of such digital deposit-like products should also be an option for the Deposit Insurer.

A committee formed by RBI for review of customer service standards in its regulated entities in its recent report has recommended extending deposit insurance cover to money kept in wallets of pre-paid card issuers.

“While there is clearly no “one-size-fits-all” solution to cover digital products, we need to choose a suitable approach which is consistent with the primary objective of the deposit insurance function,” Rao said.

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