In a recent address at the IADI Asia-Pacific Regional Committee International Conference 2024, deputy governor of the Reserve Bank of India (RBI) M Rajeshwar Rao highlighted the need for a periodic upward revision of the deposit insurance coverage limit which currently stands at Rs5 lakh. He emphasised that this adjustment is essential due to factors such as deposit value growth, inflation and rising income levels.
India's deposit insurance system, established in 1962, marked the country as the second globally to implement such a system after the United States. Managed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), the system now covers nearly 1,997 banks as of 31 March 2024. Its primary purpose is to protect small depositors from bank failures and bolster financial stability.
During his speech, Mr Rao underscored the importance of maintaining adequate insurance coverage for customer deposits. As of 31 March 2024, 97.8% of accounts in the Indian banking system are fully protected, surpassing the international benchmark of 80%. Despite this, Mr Rao acknowledged potential challenges ahead.
"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," Mr Rao said.
Currently, India’s deposit insurance coverage is uniformly set at Rs5 lakh per depositor per insured bank. Mr Rao suggested that, given the growth in bank deposits, economic development, and other factors, a periodic increase in this limit might be necessary. This would require deposit insurers to secure additional funding and explore suitable options to meet the new requirements.
Mr Rao also addressed the challenges associated with funding and risk-based premium (RBP) models. He highlighted the diversity within the Indian banking sector from global banks to small cooperative banks making data collection a significant challenge. He expressed concern that implementing an RBP could make riskier institutions more susceptible to deposit flight, potentially leading to financial instability.
Nevertheless, Mr Rao argued that with the evolution of banking products and emerging risks, a risk-based premium approach could enhance the deposit insurer's financial stability and adaptability. He stressed the need for careful consideration of adopting risk-based deposit insurance cover to ensure the robustness of the insurance system in a changing financial landscape.
As the financial landscape evolves, deposit insurers face numerous challenges and opportunities. By embracing innovation, reevaluating insurance coverage, and ensuring effective crisis management, deposit insurers can continue to play a vital role in safeguarding the global financial system.
"Deposit insurance is essential for a stable financial system. It protects depositors and supports economic growth. Regulators and insurers should update their policies to help banks manage risks, especially with liquidity. As the financial landscape changes, deposit insurers must remain adaptable to tackle new challenges and seize growth opportunities" the deputy governor says.
