Deposits in banks have somehow become the mainstay of financial savings for Indian households, perhaps because of their simplicity and implied safety. Despite the penetration of mutual funds, insurance and other alternative assets, Indian households still park 45 per cent of their financial assets in friendly neighborhood banks.
Deposit insurance is therefore considered important in helping regulators maintain public confidence in the financial system. India was the second country after the United States to establish a Deposit Insurance Corporation in 1962. This was in response to the banking crisis in Bengal and the closure of Lakshmi Bank and Palai Central Bank after independence. DICGC was formed in 1978 through the merger of Credit Guarantee Associations.
Worldwide, deposit insurance has been in the spotlight since the global financial crisis of 2008, when many major banks went bankrupt. The failure of Silicon Valley Bank in 2023 and the erosion of assets at all U.S. banks further emphasized the need to provide a safety net for depositors.
Fortunately, India’s large commercial banks, where 93 percent of household bank deposits are kept, are relatively stable. The last commercial banks for which deposit insurance was paid were Bank of Sikkim in 2000 and State Bank of Benares in 2002. Since then, the RBI has skillfully bailed out troubled banks, including merging them with other financial institutions such as Lakshmi Vilas Bank and IDBI. Alternatively, it may restructure membership fees and give plans to continue operations such as YES Bank.
But problems persist at cooperative banks, which collect deposits from many city dwellers and currently account for 7% of household bank deposits.
what works
The long-awaited hike in deposit insurance coverage from Rs 100,000 to Rs 500,000 in February 2020 has contributed to improving insurance coverage rates in the country. The coverage limits have been revised six times since their inception, but the limits have not changed since 1993. This revision improved the percentage of fully secured accounts from 92 percent to nearly 98 percent. This brings India’s deposit insurance in line with other countries with similar proportions of fully insured deposits.
Similarly, the ratio of insured deposits to total rateable deposits also saw a significant improvement, from 27.4% in 2019 to 50.9% in 2020. This percentage currently stands at 43.1%, which is lower than the global average of 47%. But it’s much better than the 30 percent in other low- and middle-income countries.
DICGC’s Deposit Insurance Fund, comprising premiums collected and investment income made from this fund, amounted to Rs 1,98,753 crore as at end-March 2024.
The fund’s ratio of guaranteed deposits is 2.11%, in line with the global median fund size of other deposit insurance companies of 2% over the past 10 years.
Therefore, insurance coverage in India is based on the IADI ( This is largely consistent with the philosophy of the International Association of Deposit Insurers. Subject to market discipline. ”
The UCB conundrum
Having said that, the Indian banking industry has a large number of smaller cooperative banks that operate with relatively light regulation and carry higher risks, creating unique challenges for deposit insurance. Of the 1,997 banks registered with DICGC as of the end of March 2024, only 140 were commercial banks, while 1,857 were cooperative banks.
In recent years, the number of bankruptcies of cooperative banks has been increasing. The RBI has canceled the licenses of 78 urban cooperative banks since 2014. Ten of these licenses were revoked in 2024. Since its inception, Rs 295.9 million has been paid out against insurance claims of 27 commercial banks. In contrast, around Rs 16,000 crore has been paid to settle claims of depositors of urban cooperative banks.
However, despite the higher risk of cooperative banks, the insurance premium charged by cooperative banks is the same as other commercial banks – 12 paisa for every ₹100 of rateable deposits. There is a strong case for charging a premium based on the risk of the business.
This helps address moral hazard when charging fixed premiums. It requires assessing a bank’s book risk based on detailed data on the bank’s credit book, governance practices, capital adequacy and asset quality.
According to IADI, around half of the world’s deposit insurers charge differential premiums that take into account additional risk measures and take into account more detailed price risks. In 2010, its share was only 30%.
Other issues
The time it takes DICGC to resolve claims can also be reduced to meet global standards. IADI recommends that most depositor claims be refunded within seven business days. About 70% of European deposit insurers and 40% of Asian deposit insurers begin making payments within seven days.
However, this schedule mandated by DICGC is very generous. The Corporation must pay depositors of banks placed under an umbrella instruction (AID) within 90 days of the date of imposition of the AID. In the case of a merger or other plan, this period may be extended by 90 days.
These schedules may have been set keeping in mind the slow adoption of technology by cooperative banks. But depositors should not be penalized for banks’ slow digital adoption. Finally, DICGC must review the compensation limits for each depositor at five-year intervals, taking into account inflation and growth in bank deposits. The share of insured deposits in total deposits has already fallen from 50.9% in 2020 to 43.1% now.
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Published October 16, 2024
