DICGC currently provides insurance coverage of up to Rs 5 lakh to bank depositors; however, with the evolving financial space, there is a need to review the insurance policy further.
The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI), provides insurance cover against bank deposits up to Rs 5 lakh. In a paper titled “Deposit Insurance: Keeping Pace with the Changing Time”, published in the Reserve Bank’s September bulletin, RBI deputy governor M. Rajeshwar Rao stressed revising the policy to address emerging challenges for insurers and banks’ preparedness against liquidity crisis.
As technology rapidly evolves, the challenges for deposit insurers have also grown. Innovations like central bank digital currencies (CBDC), tokenised deposits, social media, and threats like climate change are likely to change the financial landscape and the deposit insurance's function, so there is a need to make deposit insurance future-ready, says the report.
The report stressed on brainstorming potential solutions, including adequate coverage, premium, digital product coverage, payment timeline, and communication strategy, among other factors.
Let us explore this in detail.
Currently, DICGC follows an ex-ante (based on the forecast) finding system, which means the deposit insurers collect the funds and maintain a deposit insurance fund to pay the deposits in case of a bank failure.
These insurers collect premiums at a flat or differentiated rate depending on the bank’s risk profile or the risk-based premium (RBP). Understanding a flat rate is easy but may be considered antithetical. At the same time, the differentiated rates can encourage banks to avoid excessive risks and promote more equity in the premium assessment of the financial entities.
However, the RBP system may pose the challenge of making the riskier and vulnerable institutions prone to ‘deposit flight’ and quicken their journey to failure. So, considering India’s diverse banking sector, from scheduled commercial banks with multinational presence to co-operative banks with just a single branch, RBP could be more suitable for deposit insurers to cope with the evolving financial space, the report stresses.
Besides deposit insurance, DICGC supports bank mergers when a financially weaker bank merges with a strong bank by providing funds for any shortfall in depositors’ claims if the bank cannot meet the demand.
The report highlights that urban cooperative banks are required to drive financial inclusions and provide credit facilities to unbanked areas or areas with limited means. Thus, DICGC’s role in supporting consolidation requires more focus, for a cost reduction can also be mulled over.
Digital products are critical for financial inclusion and expansion of products and services. These are new products, so the deposit insurers should have the option of whether these products should be covered or not. The report mentions that an RBI committee has recommended extending the deposit insurance coverage to the money kept in wallets of the pre-paid card.
While the function of deposit insurance is to repay the deposited amount in case of a bank’s failure, it should also be prompt. The delay in claim settlement due to a delay in the submission of the list by the bank or incomplete information in the list could be detrimental to the trust in the scheme. So, there is a need to think of processes to make it less dependent on the stressed banks’ officials and more timely and user-friendly for the depositors, Rao stressed in the article.
It also suggests that full insurance coverage may not be a financially viable solution. So, some alternate targeted insurance approaches could be explored such as full coverage only for a certain category of customers like senior citizens or small depositors, etc.
Climate change poses a grave risk to the financial world. According to the report, climate change-related financial uncertainty is higher than ever before. It may increase the default risk of financial institutions by negatively impacting the credit quality and borrowers’ repayment capacity. Thus, a comprehensive policy considering the climate change component is needed.
Misinformation on social media may lead to a rush to the bank for withdrawals leading to a liquidity crisis for the bank. The report suggests that to tackle this behavioral issue, there is a need to increase awareness among people about deposit insurance. It can significantly reduce instinctive withdrawal by 67 per cent. A better communication strategy with a diverse range of bank customers can be useful.
Finally, deposit insurance is a tool to maintain depositors’ confidence in the system and keep it stable. The assurance of a financial safety net renders the system financially stable. The report suggests deposit insurers revise or realign their policies to enable banks to improve their liquidity risk management.
Deposit insurance was introduced in 1962. In 1978, it was merged with the Credit Guarantee Corporation of India Ltd (CGCI) and thus became DICGC. But in 2003, the Credit Guarantee Scheme was discontinued. Since then, the body has been primarily performing the role of deposit insurance to protect bank depositors from the risk of losing their savings.
There were 287 banks registered under the insurance scheme in 1962, which reached 1997 as of March 31, 2024. At present, the insurance offers a coverage of up to Rs 5 lakh per depositor per bank. However, considering the economic growth of the country, increasing income levels, etc., an upward revision in this insurance scheme needs to be explored, the report added.