RBI Deputy Governor Advocates Higher Deposit Insurance Limit Amid Rising Risks
The RBI Deputy Governor said, with the increased innovation in bank product offerings, new risks that could affect deposit growth are emerging raising the need for higher deposit insurance coverage.
RBI Deputy Governor M. Rajeshwar Rao has suggested that it might be necessary to periodically increase the deposit insurance coverage limit, which is currently set at Rs 5 lakh. This adjustment would take into account factors such as the growth in deposit values, inflation, and rising income levels.
In his valedictory address at the IADI Asia-Pacific Regional Committee International Conference 2024, hosted by the Deposit Insurance and Credit Guarantee Corporation (DICGC) last week, the Deputy Governor emphasised the need to ensure that insurance coverage for customer deposits remains adequate.
In India, he said, the number of fully protected accounts constituted 97.8%, as of March 31, 2024, of the total number of accounts in the banking system, as against the international benchmark of 80%.
While the scope and coverage appear satisfactory at this juncture, there are likely challenges going forward, Rao said.
"Today we count India to be amongst the fastest-growing large global economies and this healthy growth rate is expected to continue in the near future. A growing and formalizing economy can naturally be expected to see a sharp increase in both primary and secondary bank deposits, driving a wedge between the desirable insurance reserve requirement and the available reserve," the senior RBI official said in his address on August 14.
Currently, India employs a limited coverage approach, providing uniform deposit insurance up to Rs 5 lakh per depositor per insured bank.
"Considering multiple factors like growth in the value of bank deposits, the economic growth rate, inflation, increase in income levels etc., a periodical upward revision of this limit may be warranted. This means that the deposit insurer has to be mindful of the additional funding and needs to work out suitable options to meet the same," Rao said.
On funding and risk based premium, he said, given the diversity in Indian banking sector, ranging from scheduled commercial banks with global operations to co-operative banks operating as a single branch model with limited computerised operations, meeting the data requirements poses a great challenge.
There is also a dilemma that introduction of a RBP can render the riskier institutions more vulnerable to deposit flight and shorten the distance to failure, he said.
The RBI Deputy Governor also pointed out that, with the increased innovation in bank product offerings, new risks that could affect deposit growth are emerging. This, in turn, raises the need for higher deposit insurance coverage.
"Risk-based premium would be a better option for the deposit insurer to ensure robustness of its finances and also enhance its capability to operate in changed financial milieu. It is therefore important for us to carefully examine the option of adopting risk-based deposit insurance cover,' he added.
(With Inputs From PTI)
