Synopsis: Indian banks have requested the Reserve Bank of India (RBI) to raise the deposit insurance cover for senior citizens and provide premium relief for insuring other retail deposits. This proposal, following a recent internal meeting of bankers, emphasizes the need for greater protection for senior citizens, as they often rely solely on bank deposit incomes.
Overview of Banks’ Request for Revised Deposit Insurance:
Banks in India have approached the Reserve Bank of India (RBI) to request two key changes to the deposit insurance framework: an increase in the deposit insurance cover for senior citizens and a reduction in the premiums required to insure other retail deposits.
This development followed an internal meeting of banking executives, where the matter was discussed and escalated to the regulator.
At present, deposit insurance across the banking sector is managed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the RBI.
The current insurance limit is set at Rs. 5 lakh per depositor per insured bank, a figure that was last revised in 2021 following the passing of the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill.
The DICGC is financed through premiums paid by banks, and the fund is used to compensate depositors in case of a bank failure.
Rationale Behind the Proposal:
Banks argue that senior citizens, being more financially vulnerable, deserve higher deposit insurance cover since many rely on interest income from their bank deposits for their livelihood.
According to a senior banking executive, inflation and rising life expectancy are key factors that make a periodic increase in insurance coverage essential for this demographic.
"The protection amount should be adjusted periodically, considering factors like inflation and longevity. If the RBI and the government agree, a proportionate minimum insurance amount for senior citizens could be established," said the executive.
In August 2021, the insurance cover was raised from Rs. 1 lakh to Rs. 5 lakh.
However, any further increases in coverage will require Parliament's approval.
The premium amounts paid by banks to the DICGC, however, can be adjusted without legislative changes.
In 2020, the premium was increased from 10 paise per Rs. 100 of assessable deposits to 12 paise, a move aimed at shoring up the insurance fund.
Potential Benefits for Banks:
Apart from seeking increased coverage for senior citizens, banks are also advocating for adjustments to the premium mechanism.
They argue that the premium should only be applied to the insured portion of a depositor's balance, rather than the entire deposit amount.
This would result in cost savings for the banks, which are increasingly burdened by the rising volume of insured deposits.
Banks believe that a reassessment of how premiums are calculated is necessary, especially in light of economic growth and rising deposit levels.
The RBI, through its Deputy Governor M Rajeshwar Rao, has acknowledged the need for a periodic upward revision of the Rs. 5 lakh limit to reflect economic growth, inflation, and higher income levels.
In his address at the 2024 IADI Asia-Pacific Regional Committee International Conference, Rao stated that additional funding options may be needed to accommodate such revisions.
In conclusion, the banking industry’s push for higher deposit insurance for senior citizens reflects the growing awareness of their financial vulnerability, especially in a volatile economic environment.
If approved, this proposal would provide added security to senior citizens while offering banks relief from rising premium costs.
The discussions between banks, the RBI, and the government are ongoing, and any changes to the current framework will require careful consideration of both depositor protection and the financial stability of the banking system.
Disclaimer: This article is intended for informational purposes only and should not be considered investment or financial advice. Readers are advised to consult with a qualified financial advisor before making any decisions based on the information provided.
