Multiple reforms have been transforming the Indian banking sector in recent times and the Central Government has been striving to bolster performance by infusing more liquidity into the system. Multiple measures have been taken to this effect including greater capital infusion for banks, proposed mergers for better consolidation and performance and so on. Yet, there is one debate which continues to rage on and that is the safety of one’s hard earned savings in case the bank in question fails and ends up downing its shutters.
How protected and secure are depositors in banks really? This is the question that has been spurring multiple debates for quite some time now. The issue was muted after protests against the FRDI Bill. The bill was junked ultimately although it is now on the verge of a return, leaving customers of banks slightly jittery about the state of their finances following the collapse of PMC Bank and some other private institutions coming under the RBI’s scanner.
Key aspects to note in this regard
Some of the debaters have missed out on one crucial point, i.e. India is one of the countries with the lowest levels of protection for bank depositors in case their banks fail. Depositor insurance offers coverage for just Rs. 1 lakh for every bank account which is lower than the thresholds insured in several developed countries and other nations. Deposit insurance does offer coverage for 70% of depositors in the country though although there is one aspect worth pondering over- Accounts which have lower than Rs. 1 lakh, cumulatively comprise of 8% of overall bank accounts in the country.
This indicates that a large number of accounts have more than the safe figure in this regard. As a result, in case of a bank failure, most people will naturally be impacted severely since they will have just Rs. 1 lakh left out of their hard-earning life savings. Deposit insurance in the country is provided by DICGC (Deposit Insurance and Credit Guarantee Corporation) which collects a 0.05% premium on the entire outstanding deposit. This is the reason why depositors were anxious regarding the proposed FRDI Bill which contained a clause where it was clearly stated that depositors of banks would be required to share part of the cost of resolution of a failed bank.
Taking other countries into context
If you take into account several other economies, the insurance coverage for deposits is on the higher side. Comparing BRICS group of nations with India throws up figures where insurance figures go up to Rs. 12 lakh and Rs. 42 lakh for Russia and Brazil, for instance. This is quite high as compared to just Rs. 1 lakh for India. Several studies compared the limit for deposit insurance in India with nations with similar levels of per capita income and it was found that insurance coverage for deposits even stood at unlimited thresholds in a few nations.
The amount insured is just 0.7% of the per capita income in India while this is 3.7% in Australia and 4.4% in the United States. In Brazil, it is even higher at 7.4%.
Why Indian banking will still pull through
Once all these factors have been taken into consideration, there is something that needs to be mentioned as well. India has a solid banking sector and track record that not many other countries have over the years. There is a huge difference between our country and other economies with regard to the mainstream banking sector. In our country, no scheduled commercial bank (SCB) has ever been allowed to fail since liberalization was brought in.
The Government and apex bank (RBI) have always ensured that there is acquisition of a failed bank prior to it fully failing and downing its shutters. In India, cooperative banks are the only ones who have failed completely. Cases of 350 such cooperate banks, as per DICGC (Deposit Insurance and Credit Guarantee Corporation), have been settled till date and the total claims payout stands at Rs. 4,822 crore.
What experts feel
Experts in the banking sector feel that in spite of India’s stellar track record of not allowing banks to fail completely over several decades, the present limit for insuring deposits does have to be reviewed and divided into two segments. One would be Rs. 1 lakh of coverage for savings deposits (covering 90% of overall accounts) and coverage of Rs. 2 lakh for FDs (fixed deposits) which covers 70% of overall accounts.
Many experts and customers feel that 100% insurance coverage should be provided for all deposits and accounts. They feel that Government assurance is required in this case like it is provided for LIC (Life Insurance Corporation) customers. PSBs (public sector banks) will naturally be more consolidated, powerful and reliable after the proposed mergers as per several other experts. In this light, cooperative bank customers will be better protected. As can be seen, while theoretically, your hard-earned savings are not guaranteed total protection by your bank, practically speaking, the RBI and Government has always pulled through when it comes to saving ailing banks. They are doing the same thing now with large-scale banking sector reforms that will only stabilize it in times to come.