No safety net for bulk of banks deposits

Do bank deposits come with adequate cover? Perhaps not, as less than a third of bank deposits in value terms is currently covered by insurance.

Deposit Insurance and Credit Guarantee Corporation of India (DICGC), a wholly-owned subsidiary of the Reserve Bank of India, provides cover to deposits of all commercial banks, local area banks, regional rural banks and co-operative banks. Each deposit account is insured up to ₹1 lakh, including principal and interest. This limit applies separately to deposits in each bank. If a bank goes belly up, the DICGC pays the customer the deposit amount up to a maximum of ₹1 lakh.

About a decade back, 95 per cent of the accounts and 66 per cent of the value of deposits had the DICGC cover. But this had dropped to 92 per cent of the accounts by 2013-14, and only 31 per cent of value of deposits.

This could be due to a sharp jump in the amount held in each deposit account. In 2004-05, the average amount in each account was ₹37,000. Over the last decade this has almost doubled to ₹67,000.

 Deposit insurance cover has clearly failed to keep up with increasing sums in bank accounts. The DICGC cover was last raised in 1993 from ₹30,000 to ₹1 lakh. This was done after a long gap of 13 years.

 For over two decades the cover has remained at ₹1 lakh. Experts feel that a revision is long overdue. Even assuming an inflation of 6.5-7 over the past two decades, the insurance cover should go up to ₹5 lakh.  “The purpose of the deposit insurance was to give an additional cover to small deposit holders and provide them a safety net and confidence in the banking system. Given India’s growth in the last two decades as well as inflation, an increased cover may be considered,” says Monish Shah, Senior Director, Deloitte India.

Is the situation the same across the banking industry? No. Deposits with public sector banks are better covered than those of private or foreign banks. While public sector banks have about a third of their deposit value under the DICGC cover, it is 23 per cent in private banks and just 6 per cent in foreign banks.

But this is only because a larger portion of deposits of both private and foreign banks exceed ₹1 lakh. For instance, while state-owned banks, including the State Bank of India, hold an average of ₹66,000 in each deposit account, private banks have over ₹1 lakh. Foreign banks, on the other hand, average ₹7 lakh in each deposit account.

The total deposits held by private sector banks rose from ₹1.17 lakh crore in 2000-01 to ₹15.9 lakh crore in 2013-14, implying almost a 14-fold rise. Their public sector counterparts saw a nine-fold rise in deposits from ₹7.4 lakh crore to ₹65.9 lakh crore over the same period. Foreign banks held fixed deposits worth ₹3.5 lakh crore in 2013-14, seven times more than in 2000-01.

 An increase in insurance cover means an additional outflow for banks. Currently, the premium is paid by banks and not passed on to the customer. The DICGC charges a maximum premium of 15 paise per ₹100 per annum.

So far in India, this cover has come in handy to protect only the customers of urban co-operative banks, many of which fail every year. During 2013-14, DICGC settled claims for ₹103 crore to depositors of 51 co-operative banks.