Hike in deposit insurance to pinch banks

Indian banks may have to contend with slightly higher operating costs after the budget raised five-fold the cover on fixed deposits held by savers, with proposals to include the profitability risks of individual lenders in their premium liabilities to make the process more equitable and fair.

The budget Saturday raised the cover guaranteed by the Deposit Insurance and Credit Guarantee Corp (DICGC) to Rs 5 lakh from Rs 1 lakh. Bankers are hoping that along with the amendment to increase the amount of insured deposits, the government will also move toward a risk- based assessment of premium payable so that the high-risk lenders with profitability issues pay most of the premium. Banks pay a half-yearly premium to the DICGC for insuring the deposits of their account holders based on their total assessable deposits.

The premium paid by the insured banks to DICGC is required to be borne by the banks themselves and is not passed on to the depositors. A delay in payment of interest attracts an 8 per cent penal rate above the bank rate, which is currently at 6.5 per cent.

DICGC, which is an arm of the RBI, can also cancel a bank’s licence if a bank fails to pay premiums for three consecutive halfyear periods.

Banks pay Rs 10 for every Rs 10,000 of deposits insured. The last change in the premium calculation was made in April 2005 when it was raised from Rs 8 per Rs 10,000 of deposits.

The Rs 1 lakh limit for deposits insured was last changed in May 1993. The demand for the change in limits has gained momentum particularly after the collapse of Punjab Mumbai Co-operative Bank (PMC) last year, which forced RBI to put withdrawal restrictions on depositors.

“The budget proposal to increase the insured deposit amount will increase our cost no doubt. But one will have to see how they will work it out. There is a suggestion that instead of all banks paying the same premium, we should move to a risk based measurement which is fair because the problems are mostly coming from co-operative banks and commercial banks are paying majority of the premiums. But one will have to see how they work it out,” said Prashant Kumar, CFO at SBI.

Bankers say the cost banks will have to bear will depend on whether the government will amend the DICGC Act to include calculation for the premium paid based on the risk assessment of banks.

“It all depends on what they do and how they amend it. It has to pass through Parliament so this is just a proposal now. They may well put the high risk-high premium clause in the act, which will mean different banks will pay a different premium,” said a senior banker.

The DICGC annual report for 2018-19 shows that while a total amount of Rs 296 crore was paid toward claims of 27 commercial banks since the inception of deposit insurance, Rs 4,822 crore of claims were paid for 351 co-operative banks.

Commercial bankers argue that since the last failure of a commercial bank was decades ago, they must not be asked to pay a premium to insure depositors of co-operative banks.

Currently, there are 12 commercial banks under RBI’s prompt corrective action restrictions and they could be deemed as highrisk if that parameter is adopted.

To be sure, the DICGC has a Rs 93,750 crore insurance fund collected so far which covers 92 per cent of the bank accounts fully.

However, out of the Rs 120 lakh crore total deposits as of March 2019 just 28 per cent of Rs 33.7 lakh crore are insured. This ratio could go up after the higher deposit ceiling is adopted.

In a note, rating agency Crisil said the higher limit of Rs 5 lakh will increase coverage to over 75 per cent of all term depositors compared with 61 per cent earlier.