The government is actively considering raising the deposit insurance limit beyond the current Rs 5 lakh, a move that could slightly impact banks’ profitability, according to credit rating agency ICRA.
M. Nagaraju recently confirmed that increasing this insurance limit is under discussion
The government is actively considering raising the deposit insurance limit beyond the current Rs 5 lakh, a move that could slightly impact banks’ profitability, according to credit rating agency ICRA.
At present, bank deposits of up to Rs 5 lakh per customer are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme. Banks pay premiums to this fund to safeguard depositors’ money in case a bank collapses. M. Nagaraju, Secretary of the Department of Financial Services, recently confirmed that increasing this insurance limit is under discussion.
Speaking at a press conference on February 17, where Finance Minister Nirmala Sitharaman was also present, Nagaraju stated, “This proposal is under active consideration. Once the government finalizes it, an official notification will follow.”
The discussion around deposit insurance gained traction following the recent troubles at New India Co-operative Bank, which led to the Reserve Bank of India (RBI) restrictions on withdrawals and lending. ICRA noted that while enhancing deposit protection is a positive step, it could also put some pressure on banks’ profitability.
The last revision of the deposit insurance limit happened in February 2020, when it was raised from Rs 1 lakh to Rs 5 lakh following the Punjab and Maharashtra Cooperative (PMC) Bank crisis.
If the insured deposit ratio (IDR) increases to anywhere between 47 per cent and 66.5 per cent, banks may face some pressure on profitability.
ICRA suggests that if deposit insurance limits are raised, banks may see a slight dip in profitability. The return on assets (RoA) could fall by 0.01 per cent to 0.04 per cent, while the return on equity (RoE) might decrease by 0.07 per cent to 0.4 per cent.