SBI deposit insurance hike? Here is what may be in store for account holders

The recent PMC bank crisis has raised questions about the current challenges in India’s financial sector. Let us, however, emphasize that Indian banks are sound and are largely protected from the global vagaries given the very nature of regulation. For example, money markets in India are shielded from global spillovers by statutory liquidity ratio (SLR) requirements, allowing banks to get access to central bank liquidity as well as to secure markets, thus obviating a collateral constraint. Furthermore, banks largely fund themselves through retail deposits rather than wholesale funding, a source of vulnerability to external contagion. The State Bank of India (SBI) believes that the current upper limit of Rs 1 lakh per for its account holders (depositors) has outlived its shelf life and there is a need to revisit it. The largest commercial bank of India is of the opinion that the level of insured deposits as a percentage of assessable deposits has declined from a high of 75 per cent in FY82 to 28 per cent in FY18. Given this backdrop, SBI believes, there is a dire need to revisit the insurance coverage of the bank deposits.

Batting for a hike in deposit insurance and a resolution platform for NBFCs (Non Banking Financial Companies) Dr Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India said, "We believe the time is now appropriate for some changes in the financial market architecture. 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 per cent in FY82 to 28 per cent in FY18. Given this backdrop, 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. Further, over the years, the composition of the Bank deposits has undergone massive changes in India." Ghosh said that in this backdrop, the DICGC coverage should be revised and bi-furcated into 2 categories: 1) Desirable coverage of at least Rs 1 lakh for SB deposits (around 90 per cent of the total SB accounts) and 2) desirable coverage of at least Rs 2 lakh for Term Deposits (around 70 per cent of the total TD accounts).

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"There should also be a separate provision for senior citizens. This revision in DICGC coverage becomes all the more desirable in the Indian context, where senior citizens or retired people have no social security in place and mostly keep fixed deposits for earning interest income. Apart from this, it is also suggested 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. This will herald a new paradigm in the Indian deposit banking sphere since tax-free and guaranteed payments of a certain income will do much to encourage depositors to come forward with offers to provide a part of their savings in exchange for the shares in the banks," Ghosh concluded.