Amidst the Punjab and Maharashtra Cooperative (PMC) Bank financial crisis, there is the talk of increasing the deposit insurance limit all around. The Economic Research Department of the State Bank of India has come out with a report, authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, titled, “Time for a hike in deposit insurance and a resolution platform for NBFCS”
The deposits in a bank, including savings account, current account, fixed deposit, and even recurring deposits, are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the Reserve Bank of India.
As per the DICGC rule, the insurance cover is capped at Rs 1 lakh, including the principal and interest amount of each depositor. This limit is the total amount across all bank branches of the same bank, which means deposits in different banks will be treated separately for insurance coverage.
The report states that studies suggest that since 1993, there has been a paradigm shift in the profile of customers and the conduct of business by banks. In particular, over the years, the level of insured deposits as a percentage of assessable deposits has declined from a high of 75 percent in FY82 to 28 percent in FY18.
This means a big proportion of the customer money lying in banks is out of the insurance ambit as the limit of Rs 1 lakh remains low, while the amount of deposit has grown manifold over the decades.
The report says, “We believe, there is a dire need to revisit the insurance coverage of the bank deposits. In particular, the current upper limit of Rs 1 lakh per depositor, we believe, has outlived its shelf life and there is a need to revisit it.”
Desirable coverage of at least Rs 2 lakh for Term Deposits (around 70 percent of the total Term Deposits accounts). It means the limit needs to be at least double for fixed deposits. For the retirees and senior citizens, bank fixed deposits have always remained a popular choice for keeping a sizeable portion of their retirement kitty for meeting their regular income needs. The report suggests that there should also be a separate provision for senior citizens. The TDS limit for senior citizens has recently been increased to Rs 50,000 that will allow senior citizens to keep a higher amount in one bank, without levy of tax at source on interest income. If the insurance limit is also increased, the senior citizen’s money also gets added security.
Finally, the report suggests a novel way that depositors should get an incentive to spare a part of their total deposits to buy Bank Bonds that provide guaranteed coupon rates on a half-yearly basis and are tax-free.