Public sector banks (PSBs) have a much higher insured deposit ratio vis-à-vis private sector banks (PVBs), indicating concentration of larger-sized deposits with the latter, according to the latest Financial Stability Report (FSR).

The insured deposit ratio (insured deposits/assessable deposits) of PSBs was at 51.3 per cent vs 36.6 per cent for PVBs at the end of March 2023, per the report, which has contributions from all financial sector regulators.

This metric indicates that PSBs have more deposits within the present deposit insurance limit of ₹5 lakh, while PVBs have more deposits above the ₹5-lakh limit. Deposit amount over and above the ₹5-lakh limit has no insurance cover.

The larger deposit size of PVBs comes in the wake of these banks offering higher (term) deposit rates vis-a-vis PSBs in the rising interest rate cycle.

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Aggregate deposits growth, which had undergone a slight moderation during 2021-22 and H1 FY23, picked up pace to reach 11.8 per cent as on June 02, 2023. The report underscored that this growth was mainly driven by PVBs.

Overall, the insured deposit ratio was higher for cooperative banks (64.9 per cent) followed by commercial banks (45.2 per cent).

Co-operative banks include urban co-operative banks, State co-operative banks and district central co-operative banks. Commercial banks include PSBs, PVBs, foreign banks, small finance banks, payment banks, regional rural banks and local area banks.

According to the report, 98.1 per cent of the total number of deposit accounts (300 crore) and 46.3 per cent of assessable deposits (₹181.14 lakh crore) were fully insured.

Deposit insurance reform

Referring to the recent banking failures in advanced economies, the FSR noted that forceful and swift resolution by policy authorities in the affected jurisdictions have restored stability and contained a broader spillover.

“The loss of confidence among depositors, amplified by mobile apps and social media, has warranted rethink on financial regulation, including run-off factors assumed for deposits and the 30-days stress period for calculating net cash outflows, and the contours of deposit insurance,” it added.

The FSR highlighted the report of the Federal Deposit Insurance Corporation (FDIC) on the “Options for Deposit Insurance Reform”, which observed that bank failures were largely caused by convergence of rapid asset growth in banks funded by uninsured deposits, exposure to unrealised losses in their securities portfolio and business models concentrated on providing services to digital asset firms.

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The FDIC report flagged the contribution of technological developments in quickening information dissemination and consequently, faster depositor runs.

Three options to reform the deposit insurance system were offered: (a) limited coverage, which maintains the current structure of finite deposit insurance limit; (b) unlimited coverage of all deposits; and (c) targeted coverage, which allows different levels of deposit coverage across different types of accounts and focusses on higher coverage for business payment accounts.

The report identified the third option (targeted coverage) as having the greatest potential to mitigate undesirable consequences related to cost of coverage.

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