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Informist, Monday, Aug 19, 2024

 

MUMBAI – Economic growth, the rise in value of bank deposits, inflation, and increase in income levels warrant periodic upward revision of deposit insurance coverage, Reserve Bank of India Deputy Governor M. Rajeshwar Rao said at an event organised by the Deposit Insurance and Credit Guarantee Corp last week. Currently, uniform deposit insurance coverage of up to 5,00,000 rupees per depositor of each insured bank is applicable in India.

 

Rao delivered his speech on Wednesday at the 2024 international conference of the Asia-Pacific Regional Committee of the International Association of Deposit Insurers. A copy of the speech was uploaded on the RBI website today.

 

Rao said it is imperative for regulators and deposit insurers to realign their policies and regulations to enable banks to manage risks and enhance capabilities. "As I see it, we should explore the need to examine whether deposit insurance should expand vertically (increase the cover offered) or horizontally (increase the nature of entities to be covered through insured products) and also explore its role along a third dimension reflecting fintech innovations which change the way depositors’ liabilities reside within the financial services sector," Rao said.

 

He suggested moving towards a risk-based deposit insurance cover from a flat rate premium structure. However, he also said risk-based deposit insurance is extremely data-driven and, given the diversity in the Indian banking sector, meeting the data requirements is challenging.

 

Rao also said there is a dilemma that the introduction of risk-based premiums could make riskier institutions more vulnerable to rapid withdrawal of deposits and "shorten the distance" to failure.

He reiterated the importance of a streamlined process for depositors to access their funds with the least disruption. He pointed to several challenges in this connection, such as delay in submission of lists of eligible depositors, non-availability of complete information with banks, and lack of alternative bank accounts of depositors, particularly in the case of small co-operative banks.

 

The impact of climate change and the risks related to deposit insurance have largely not been dealt with, Rao said. "A 2022 survey of IADI members indicated 60% of deposit insurers do not have a formalised Environment, Social and Governance policy that goes beyond existing legal obligations. Therefore, assessing the impact of climate change on risks to deposit insurers and framing a comprehensive policy incorporating elements of climate change may also need to be carried out in all jurisdictions," he said.

 

He also suggested that public awareness of deposit insurance needs to be strengthened as misinformation could lead to a frenzied reaction from depositors. "Deposit insurers must, therefore, take initiatives to increase awareness about deposit insurance, as educating depositors about deposit insurance can be of great help in restricting the instinctive response of depositors to rush and withdraw their deposits, which eventually helps in minimising the disruption to the financial system," he said.  End

 

Reported by Kshipra Petkar

Edited by Rajeev Pai

 

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