You could lose a large part of your savings if your bank fails
India is among the countries that offer the lowest protection to depositors in cases of bank failure.
Protection of bank depositors, the issue that stoked fervent debates while the bill was being introduced two years ago, had receded to the background after the bill had to be shelved in the wake of intense protests. But it is now back to stoke fears once again among depositors left edgy by PMC Bank's failure and a few private lenders coming under RBI lens.
It pertains to a matter most bank customers are not aware of — India is among the countries that offer the lowest protection to depositors in cases of bank failure. Here, depositor insurance covers only Rs 1 lakh per bank account, a level way below that of developed countries and even of the nations at the same stage of development as India.
Low on safety: An Indian thing?
In terms of numbers, India's deposit insurance scheme covers as many as 70 per cent of bank depositors. But there is a sizeable catch — accounts that have less than Rs 1 lakh together make up only about 8 per cent of total bank a/cs.
That means an overwhelming number of accounts hold more than the 'safe' amount. Which essentially means that a bank failure would be nothing short of an unprecedented catastrophe, because a depositor would be left with just one lakh of what was her entire life's savings, which — for most people — usually amount to several lakhs.
This is precisely why the FRDI Bill frightened India — it had a clause that said bank depositors would have to "share part of the cost of resolution of a failed bank".
How other nations fare
Among India's peer economies in the BRICS, the portion of deposit covered under insurance is way higher. ""If we compare India with BRICS group of countries like Brazil and Russia, the comparative insurance figure rises to Rs 42 lakh & Rs 12 lakh respectively!" ToI says quoting Soumya Kanti Ghosh, chief economic adviser, SBI.
"If we compare the deposit insurance limit in India with countries having similar per capita income, we find that the insurance cover is even unlimited in some countries," Ghosh adds.
India also fares utterly poorly when the amount insured is seen as a percentage of per capita income. In India it stands at a pathetic 0.7 per cent, while Australia has it at 3.7 per cent, the US at 4.4 per cent, and Brazil at a fairly respectable 7.4 per cent.
The case for India
One thing, however, must be taken note of — India can boast of a record that others can't.
There is a significant difference between India and other markets when it comes to banking. In India, no scheduled commercial bank has been allowed to go under since liberalisation. The central bank and the government have always made sure that a failing bank gets acquired before it drowns.
Only cooperative banks have failed here. As per figures from the Deposit Insurance and Credit Guarantee Corporation (DICGC), the cases of about 350 such banks have been settled so far for a payout of Rs 4,822 crore in claims.
It is worth noting that DICGC is the authority that provides deposit insurance in the country.
According to SBI's Ghosh, the current limit of deposit insurance needs to be revisited, and that this limit has outlived its shelf life. "The DICGC coverage should be revised and bifurcated into two categories - desirable coverage of at least Rs 1 lakh for savings deposits (around 90% of the total accounts) and desirable coverage of at least Rs 2 lakh for fixed deposits covering 70% of total accounts," he says.
Why should depositors not get 100 per cent insurance cover, asks Vishwas Utagi, convener of the PMC Bank depositors' association. He says all the money of depositors should be insured. "Just like the government assures customers of Life Insurance Corporation, similar assurance is needed for bank deposits," he adds.
Utagi makes another very important point: "Public sector banks, which were meant to reach out to all Indians, will be shrinking after mergers. Given this backdrop, customers of cooperative banks should be protected."