PMC Bank crisis sparks demand for deposit insurance hike

The crisis in Punjab and Maharashtra co-operative bank (PMCB) has raised the immediate need to hike the deposit insurance in India.

State Bank of India's economic report Ecowrap has called for an urgent rise in the deposit insurance, especially since senior citizens and retired people do not have any social security. Now deposits of up to Rs 1 lakh are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). The PMC Bank had over Rs 11,000 crore of deposits with a large number of older people being the deposit base.

The SBI's report said studies suggest that since 1993 there has been a paradigm shift in the profile of customers and the conduct of business by banks. In particular, over the years, the level of insured deposits as a percentage of assessable deposits has declined from a high of 75% in fiscal 1982 to 28% in fiscal 2018. "Given this backdrop, we believe, there is a dire need to revisit the insurance coverage of the bank deposits. In particular, the current upper limit of Rs 1 lakh per depositor, we believe, has outlived its shelf life and there is a need to revisit it," SBI's Ecowrap said.

The report said this is needed as the composition of deposits has undergone massive changes. "This revision in DICGC coverage becomes all the more desirable in the Indian context, where senior citizens / retired people have no social security in place and mostly keep fixed deposits for earning interest income," the report said. "Apart from this, it is also suggested that depositors should get an incentive to spare a part of their total deposits to buy bank bonds that provide guaranteed coupon rates on a half-yearly basis and are tax-free. This will herald a new paradigm in the Indian deposit banking sphere since tax-free and guaranteed payments of a certain income will do much to encourage depositors to come forward with offers to provide a part of their savings in exchange for the shares in the banks," the report said.

Source: DNA