A teller counts a bundle of Indian Rupee currency notes at a financial institution in Mumbai. The failure of a bank last month has triggered a debate on the level of insurance coverage for deposits held by the public. Image Credit: REUTERS

Dubai: Non-resident Indians (NRIs) who keep a substantial portion of their savings in fixed deposits in Indian banks are increasingly growing jittery over the safety of their deposits in the context of abysmally low deposit insurance and shrinking yield on bank deposits due to successive interest rate cuts.

The failure of Punjab and Maharashtra Co-operative (PMC) Bank last month has triggered the debate on the low level of insurance coverage for deposits held by the public in banks.

The Reserve Bank of India (RBI, the central bank) last month ordered PMC Bank, a large interstate co-operative bank not to do any business for six months and capped depositor withdrawals at Rs1,000, (subsequently raised to Rs40,000) throwing the lives of thousands of depositors into disarray.

While the regulator appointed an administrator for the bank, the crisis has highlighted the low safety of depositors in Indian banks. Although the cooperative bank has not gone into liquidation, the risk to depositors’ money remains a matter of concern.

Deposit insurance ensures the depositor gets a certain amount, before the bank pays other parties it owes money to during the liquidation process. The Deposit Insurance and Credit Guarantee Corporation of India (DICGC), a subsidiary of the RBI offers deposit insurance up to Rs100,000. In essence the insurance amount is capped at a maximum fixed amount irrespective of the size of the deposits held by customers.

The PMC Bank debacle has brought back the focus on deposit insurance and depositors’ protection. While the government is reportedly considering the raising of insurance amount, fixed deposit investors and people keep significant amount of their savings in banks are increasingly worried about the safety of their money.

Reminders of risks

Last week a leading Indian private sector bank, HDFC Bank had to issue a clarification with reference to an image of a passbook bearing a stamp of deposit insurance cover being circulated on social media.

The image that surfaced on social media showed an HDFC passbook with a stamp claiming deposits in the bank up to Rs100,000 is insured. This created much panic among customers as people began sharing the image on all platforms.

“The deposits of the bank are insured with DICGC and in case of liquidation of the bank, DICGC is liable to pay each of the depositors through the liquidator. The amount of this deposit is up to Rs1 lakh within 2 months from the date of claim list from the liquidator,” the stamp read.

HDFC Bank later clarified said that the information was not new and was according to RBI circular on June 22, 2017.

“This pertains to information about the deposit insurance cover. We would like to clarify that the information has been inserted as per RBI circular dated June 22, 2017 which requires all Scheduled Commercial Banks, all Small Finance Banks and Payment Banks to incorporate information about ‘deposit insurance cover’ along with the limit of coverage upfront in the passbook,” the bank said in a statement.

Insurance debate

Insurance protection on deposits in India is one of the lowest in the world. A recent report by the State Bank of India (SBI), a leading public sector bank highlighted the inadequate depositor protection triggering a debate on the coverage.

The deposit insurance cover was last hiked in May 1993 to Rs100,000 from Rs30,000 in July 1980. Currently the number of registered insured banks stood at 2,098, comprising 157 commercial banks and 1,941 cooperative banks.

According to the SBI report, in India, deposits are insured up to Rs100,000, while the number for countries like Brazil and Russia stand at Rs4.5 million and Rs1.2 million, respectively.

Even by Asian standards, India is far behind in deposit insurance. The deposit insurance scheme of Philippines insures up to 500,000 pesos ($9,500) per depositor, while Thailand insures close to 5 million bahts ($160,000), according to respective central bank websites. In China, this insurance is for up to 500,000 yuan ($70,000) per depositor. At ₹1 lakh, India’s coverage is a meagre $1,400.

RBI data shows much of the incremental savings continue to flow into bank deposits. In 2017, bank deposits formed roughly 66 per cent of the net financial assets of households. What this means is that risk-averse people, like NRIs who choose bank deposits to park their life savings could lose a large chunk of their fund in case of a bank failure.

The SBI report states that since 1993, there has been a paradigm shift in the profile of customers and the conduct of business by banks. According to the report, while 75 per cent of the bank deposits were covered under insurance in the fiscal year 1982, this dropped to 28 per cent in 2018.

“So clearly, it seems on paper that the number of small depositors is adequately covered in terms of insurance cover, but in terms of quantum of deposits, we observe that percentage of deposits less than Rs100,000 is only 7.8 per cent of the deposit base,” the report said.

“The DICGC coverage for term depositors of banks should be doubled from the existing Rs1 lakh to Rs2 lakh,” said Soumya Kanti Ghosh, group chief economist at the State Bank of India in the report.

“There should also be a separate provision for senior citizens and retired people because these people have no social security in place and mostly keep fixed deposits for earning interest income which in many cases becomes a part of their current income for regular upkeep,” he added.

Panic is no option

India is a bank-led economy and banks command a large share of household savings. The public’s trust in banks in India is one of the highest in the world, largely because the sector has been historically dominated by public sector banks following the banks nationalisation in 1969. Additionally, bank failures have been rare in India.

While investors need to be cautious about the health of the banks in which the park deposits, it may be advisable to diversify financial investments in terms of instruments and institutions.

How to mitigate risks?

— Don’t park the entire savings in one institution or any one particular scheme

— Keep some portion of deposits in public sector banks

— Avoid risky non-bank financial service companies

— Take care in choosing co-operative banks

— Diversify savings into financial instruments such as stocks, bonds, mutual funds