The latest Punjab & Maharashtra Cooperative bank crisis has put the focus back on bank deposit insurance. In India, the insurance limit of deposits is woefully small compared to other economies as the amount has not been raised in the last 26 years.
At a time when the banking sector is going through liquidations and amalgamations, a low sum insured is a danger to depositers.
Woefully small
As of today, bank deposits are insured for a sum of ₹1 lakh -- this figure was last revised in 1993. The graph shows how the insurance limit was increased over the years.
Smallest in comparison
Compared to many BRICS nations, countries of comparable per capita income and advanced economies, India has the lowest deposit insurance limit. Graph shows the latest bank deposit insurance limits across select nations in $.
Uninsured share
As of FY19, only 28% of Indian bank deposits were insured. Back in FY '92, it peaked at 75.4%. In the following years, income levels increased, and deposits grew, thus rendering the deposit cover “insufficient”
Those in the middle
61% of bank accounts have less than ₹1 lakh, but they contribute to only 7.8% of the total deposit base - They are the safest customers in case a bank fails as their entire money is insured.
On the other end of the spectrum, 0.2% of bank accounts have more than ₹1 crore, and they contribute to 32.5% of total deposit base. Most of these accounts are in stronger banks which rarely fail.
About 38.7% of accounts which have between ₹1 lakh and ₹1 crore 59.7% of the total deposit base. contribute 39% of the total deposit base.
The premium amount paid by banks to DICGC for maintaining the insurance fund have far exceeded the claim amounts till now. This is becasue most banks that failed in recent times were smaller cooperatives.
But if the insurance limit is hiked to ₹5 lakh, as suggested by the Damodaran committee, or when a big bank fails, the going may get tough. The move will increase the confidence of depositors in a sector which is suffering from rising bad debts and going through massive mergers.
Source: SBI research desk, DIGC annual reports
