Bank deposits are among the safest asset classes in the world allowing banks the leeway to raise a sizeable share of their resources at one of the most competitive rates. Given the share of savings mobilised by them, they are also subjected to increased regulatory oversight.

Worldwide, central banks are the lenders of last resort, subject to certain conditions. However, despite this, bank failures take place even in countries with well-developed regulatory regimes. Such instances of failures create panic among depositors, leading to even more widespread cross-border problems for the other banks, regulators and economies. Hence, the assurance on the safety of the deposits is of paramount importance.

In the domestic context, the regulatory approach for resolution of failed universal banks has ensured that depositors, irrespective of the deposit size, have not lost money in any such drastic instances till date. This reflects in high depositor confidence among most of the universal banks over the safety of their deposits.

Further, in all these resolutions, the reliance was minimal on the Deposit Insurance and Credit Guarantee Corporation (DICGC), wholly owned by the banking regulator. However, the same cannot be said of the regulatory approach for resolution of co-operative banks, with relatively higher instances of failures and loss of money.

Currently, the DICGC charges 12 paisa per ₹100 of the insured deposit (or 0.12 per cent) from all banks and based on the insurance coverage of ₹5 lakh per depositor account, it fully insures 98.1 per cent of the total depositor accounts and 46.3 per cent of the total deposits of the banking system.

‘Co-op’ risk

However, the deposit coverage has remained at ₹5 lakh since February 2020. Since inception, DICGC has paid total claims of ₹15,031 crore, of which, more than 97 per cent were paid towards depositors of failed co-operative banks, while they had a small 6 per cent share in deposit insurance premium paid in FY2023.

With a deposit insurance fund (DIF) of DICGC of ₹1.7 lakh crore (coverage of 1.8 per cent of the insured deposits) as on March 31, 2023, an increase of insured deposit per depositor account would impact the coverage ratio of DIF substantially. However, as the DIF coverage of Indian banks remain much higher than that provided across many other larger economies, there is a scope to increase the deposit coverage per depositor account.

With almost two-thirds of the total deposit of the domestic banking system with public sector banks, the concerns about bank failure do not weigh enough on the minds of the depositors. This is also evident from the fact that most public banks continued to gain deposits even when many of them were placed in the prompt corrective action (PCA) framework in the past due to losses and weak capital position. At that point of time, the deposit insurance coverage was even lower at ₹1 lakh per depositor account.

Lastly, if public banks are backed by sovereign ones, then should they bear the same cost of deposit insurance when compared to their private counterparts and whether there should be a risk-based pricing system in place. The demand for risk-based pricing seems to be fair, and with most banks having external credit ratings, there already exists a pecking order which investors look at while placing deposits at higher rates with some of these banks. However, the regulator must ensure that such risk-based higher pricing for some banks does not lead to higher risk aversion and challenge the sector’s financial stability.

While the enhanced deposit insurance coverage is beneficial, the DIF coverage can remain comparable or better than that of other larger economies though the ways to augment it by hiking the insurance premium without cross-subsidisation need to be worked out for before implementation.

The writer is Senior Vice-President, Group Head - Financial Sector Ratings, ICRA

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