Recent figures show a disparity between the premium collected from and claims settled for PSBs. Exempting them from the Deposit Insurance Scheme should be considered
A study conducted by State Bank of India’s economic research department reportedly states that there is a dire need to revisit the insurance coverage of the bank deposits, as over the years, the percentage of assessable deposits has declined from a high 75 per cent in FY12 to 28 per cent in FY18. The current upper limit of ₹1 lakh per depositor has outlived its shelf life, and there is a need to revisit it, says the report.
The details are nothing new, and are already available in the public domain through the Annual report of the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Though the DICGC used to provide credit guarantee as well, at present, it offers only insurance for bank deposits.
The need to provide deposit insurance was felt when banks were predominantly under private ownership. The concept of insuring deposits kept with banks received attention for the first time in the 1948, after the banking crisis in Bengal. The issue came up for reconsideration in 1949, but was held in abeyance till the Reserve Bank of India set up adequate arrangements for the inspection of banks. Subsequently, in 1950, the Rural Banking Enquiry Committee supported the concept.
However, the Deposit Insurance Act, 1961 came into force only on January 1, 1962, after the failure of Palai Central Bank Ltd and the Laxmi Bank Ltd in 1960.
The Deposit Insurance Scheme was initially extended to all functioning commercial banks, including SBI and its subsidiaries as well as the branches of the foreign banks operating in India. From 1968, it was also extended to co-operative banks.
Before suggesting any changes in the coverage of the deposit insurance, it is essential to analyse how the scheme has performed over the years.
Since 1963, the DICGC has settled claims of 27 commercial banks and 351 cooperative banks with claim amounts of ₹295.85 crore and ₹4822.33 crore respectively. No amount has ever been settled for any public sector bank.
For FY19, the deposit insurance coverage for 19 public sector banks (PSBs) was ₹2,22,44 billion, for 87 private institutions (foreign banks, private banks, payments banks, small finance banks, local area banks) ₹5,430 billion, for 51 RRBs ₹2251 billion and for 1941 cooperative banks ₹3,775 billion.
For the year ended 2018-19, the DICGC has collected premium amounting ₹111.9 billion from commercial banks and ₹8.5 billion from cooperative banks.
Footing the bill
The following facts emerge from these figures:
Ninety-three per cent of the premium collection is from commercial banks. Only 7 per cent of the premium collection is from cooperative banks.
If the amount of coverage is taken into account, then the premium collected from PSBs will be 75 per cent (or even more, if RRBs are grouped under the public sector) and that from private sector (other than cooperative banks) will be 18 per cent.
The share in claims settled, is 5.78 per cent for commercial banks, 94.22 per cent for the cooperative banks and zero per cent for PSBs.
It is evident that the premium collected from the public sector entities is continuously used to bail out the cooperative banks.
Hence, what is required is not simply enhanced coverage for the deposit amount. Insurance is a risk coverage mechanism and this should be based on the risk perception. Deposit insurance was mooted when private sector banks failed and PSBs, except State Bank of India, were not in the picture.
This is no longer applicable, as the government now has the wherewithal to come to the rescue of the depositors in case any public sector bank fails. No sovereign government can afford to declare any of its own banks as bankrupt. PSBs should not be unnecessarily allowed to foot the bill for the failure of cooperative banks. It is high time PSBs should be exempted from the purview of the deposit insurance scheme.
The DICGC, after all, is a part of the RBI, and should be rightly treated as a government unit. There is no need to provide insurance from one arm of the government to another arm.
The writer is a retired banker
via Do public sector banks really need deposit insurance? – The Hindu BusinessLine