The festival of lights ‘Diwali’ is a time of great enjoyment, fun and frolic. On this very Diwali day, the goddess of wealth, Lakshmi is said to have been incarnated from the depth of the bottomless ocean. Also, around this time we commemorate the victory of good over evil as the evil demon Narakasura was killed by lord Vishnu who was incarcerated as Lord Krishna in the Dwapara Yuga.
There are many more reasons to celebrate Diwali, but this Diwali will be bit of a dampener for those affected by the PMC Bank restrictions on account of the alleged irregularities committed by the management. And in the absence of adequate insurance there is no immediate relief in sight. Which brings me to the subject of my column today, is it time to increase the bank deposit guarantee amount?
What is Bank Deposit Guarantee Amount?
A person’s aggregate deposits in a bank, including fixed deposits, are insured up to Rs 1 lakh by the Deposit Insurance and Credit Guarantee Corp (DICGC), a wholly owned subsidiary of the Reserve Bank of India (RBI). So, in case of a default by scheduled commercial or cooperative banks, DICGC will pay up to Rs 1 lakh to each depositor. DICGC was formed in 1961with a sum assured of Rs 1,500 per deposit. Since nationalisation of banks, mergers and acquisitions during critical junctures in the sector has helped avoid bank failures. This sum assured was then increased to Rs 30,000 since 1980 and the last revision revised the same to Rs 1lakh in the year 1993 at which it stands as of today.
The need for increase.
Deposit guarantee of Rs 1 lakh available at present is useful for small savers. However, if the sum of savings and fixed deposits are taken together, the amount of insurance cover will tend to be very low for households which normally park most of their savings in these accounts. It is normally assumed, and quite rightly too, that banks will never fail and hence there is an implicit guarantee, which leads to the assumption that bank deposits are totally safe. While this may be true for public sector banks, it isn’t for other banks. This risk has never been highlighted because we have not had instances of commercial banks failing, leading to depositors losing money as such banks are normally merged with stronger ones with RBI’s intervention. There is a need to increase the insurance limit for deposits. As deposits are the base that provide banks with lending opportunity, there must be maximum protection. Explicit insurance should be provided for a larger amount to ensure that deposit holders continue to channel their savings to banks.
How much is adequate insurance?
RBI’s latest figures indicate that while all bank accounts are covered under DICGC, only 28% of the total number of bank deposits are covered under deposit insurance. Which is understandably a very low percentage. As the last revision pegged the deposit guarantee to Rs 1 lakh in 1993, linking the deposit guarantee with the increasing inflation since then can be one way of revising the deposit guarantee for eg the earlier Cost inflation Index (CII) for the year 1993 as provided by the government can be compared with the CII of 2019 to arrive at the new deposit guarantee. By this logic the new deposit Guarantee could be anywhere between 5 to 7 lakh. Which is a reasonably better amount and could cover on an average more than 60% of the bank deposits with most banks as of today.
It must be noted that DICGC charges an insurance premium from banks which is 0.1% of the insurable deposits of each bank. If the amount of insurance is increased, then the premium charged will also increase, which in turn will either be passed on by banks to depositors by way of lower deposit rates or to the borrowers in the form of higher lending rates. I am reasonably certain that given such uncertain times and the increasing NPA’s reported by the banks the depositors will be happy to pay an increased premium on the hiked deposit guarantee rather than facing tumultuous pain of seeing the money go down along with the erring bank. To cut the long story short, it’s more than just insuring money in the Bank; it’s about securing your peace of mind.
