Private banks will get more of the coverage of Rs 5 lakh from Budget

MUMBAI: Private sector banks will be the biggest winners of the government's decision to increase the coverage of deposit insurance to Rs 5 lakh from Rs 1 lakh in the Union Budget. However, the highest insurance costs, estimated at Rs 28.4 billion rupees, will be borne by the entire banking system.

According to Credit Suisse, the estimated increase in the deposit insurance premium would be around Rs 28.4 billion rupees ($ 4 billion) for the system, which will probably be transferred to bank customers.

Almost all claims paid by the Deposit Insurance and Credit Guarantee Corporation (DICGC), the RBI arm that insurers' deposits, have been with respect to cooperative banks. While private lenders have failed in the past, they merged with stronger banks, using moral persuasion in some cases.



Although cooperative banks have been failing frequently, it is unlikely that deposit coverage will give them enough leverage to expand their base, since most of them are regional. On the other hand, private banks now have a pan-Indian reach and often run the risk of running in the bank after rumors.

Meanwhile, public sector banks, including those that recorded losses for 10 successive quarters and reported a high percentage of NPA, have never seen a leakage of deposits. Even when the RBI placed half of the nationalized banks in a corrective action framework (PCA), depositors never withdrew funds as they were convinced of government support.

The DICGC received total premium income of Rs 12,043 crore from banks in 2018-19. The deposit insurance fund stood at Rs 93,750 million rupees in fiscal year 19. It secured deposits of Rs 33.7 lakh crore from the total of Rs 120 lakh crore of 2,098 banks. Although the coverage was multiplied by five, the premium will not increase proportionately because the number of deposits of Rs 5 lakh is small in relation to the total deposit base.

According to ICRA SVP and group leader (financial sector ratings) Karthik Srinivasan, awareness of deposit insurance would not be high. He said the fact that the increase in coverage of deposit insurance to Rs 5 lakh was announced in the Budget would raise awareness and bank deposits would be considered safer.

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