Urgent Push for Enhanced Differential Deposit Coverage: What You Need to Know – The Times of India

MUMBAI: India has one of the largest deposit insurance funds in the world, amounting to nearly Rs 2 lakh crore. However, it only covers 46.3% of bank deposits because of a Rs 5 lakh insurance limit, placing it 8th globally in terms of coverage.

Bankers believe the current insurance scheme is sufficient. Most deposits are with stable public sector banks that are unlikely to collapse. Additionally, many customers at cooperative banks have their accounts fully covered.

Recent events, like the Reserve Bank of India’s (RBI) action against the New India Cooperative Bank, have reignited discussions about raising the deposit insurance limit. Senior citizens, in particular, are concerned about protecting their savings. They argue that their retirement funds are at risk and demand higher coverage.

Calls for a tailored approach to deposit insurance continue to grow. In August 2024, RBI Deputy Governor M Rajeshwar Rao suggested reviewing insurance premiums for certain groups, like small depositors and senior citizens, to ensure full coverage. He mentioned the potential of targeted insurance solutions that could benefit specific customer segments.

The deposit insurance limit has changed significantly over the years. It started at just Rs 1,500 in 1962 and increased slowly over the decades, reaching Rs 1 lakh in 1993. It remained unchanged until a major revision in 2020, where it spiked to Rs 5 lakh following crises in private banks like Yes Bank.

Coverage levels vary among different types of banks. Payments bank accounts enjoy almost full insurance, while rural banks have around 80.3% coverage. Cooperative banks provide 63.2%, public sector banks 48.9%, private banks 32.7%, and foreign banks only 5%.

On the global stage, the insured deposit ratio varies widely. In Turkey, only 21.5% of deposits are insured, while Belgium boasts a much higher rate of 71%. On average, deposit insurers worldwide cover about 41% of eligible deposits, leaving 59% uninsured as of 2022.

In India, the ratio of uninsured deposits to assessable deposits has remained below 80% until March 31, 2024, which aligns with the “80/20” rule. This suggests that the insured deposit ratio should ideally exceed 20%. The ratio had been under 50% for almost four decades until 2009 but improved to 56.9% by March 31, 2024, comparable to global standards.

These discussions highlight the need for a balanced approach to protecting depositors, especially in an evolving banking landscape. Understanding these dynamics is crucial for customers as they navigate their savings and the safety of their funds.

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