There should be insurance cover of at least Rs 1 lakh for savings bank account and Rs 2 lakh for term deposits.
The recent PMC bank crisis has raised questions about the problems in the India’s financial sector. Let us, however, emphasise that Indian banks are sound and are largely protected from the global vagaries given the very nature of regulations. 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 secured 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.
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. Over the years, the level of insured deposits as a percentage of assessable deposits has declined from a high of 75% in FY82 to 28% in FY18. Given this backdrop, there is a dire need to revisit the insurance coverage of bank deposits.
The current upper limit of Rs 1 lakh per depositor has outlived its shelf life and there is a need to revisit it. Further, the composition of the bank deposits has undergone massive changes. The Deposit Insurance and Credit Guarantee Corporation (DICGC) coverage should be revised and bi-furcated into two categories: 1) Desirable coverage of at least Rs 1 lakh for savings bank deposits (around 90% of the total SB accounts) and 2) desirable coverage of at least Rs 2 lakh for term deposits (around 70% of the total TD accounts).
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 / 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.
For problems in the NBFC sector, time has now come to think of an NCLT-like framework to enhance investor confidence and provide a fillip to lending to the NBFCs. However, this must be done in conjunction with identifying NBFCs with a weak balance sheet and working on a quick resolution. This could be, say, facilitating an ownership change or bringing in a financially strong promoter. In 2017, the government introduced “The Financial Resolution and Deposit Insurance (FRDI) Bill” in Parliament but has withdrawn it in 2018 due to the bail-in clause and mass protest across the country. We believe that the government should again promulgate the FRDI bill without the “bail-in” clause since, in India, the average income of a vast majority of depositors is modest.
(The writer is group chief economic adviser, SBI. Edited extracts from SBI Economic Research Department’s report: ‘Time for a hike in deposit insurance and a resolution platform for NBFCS?’)