New Delhi [India], August 19 (ANI): Asserting that full insurance coverage for all depositors appears somewhat financially non-viable, RBI Deputy Governor M. Rajeshwar Rao suggested that if this could be given to certain sections of the customers — small depositors, senior citizens, or pools deposits of smaller depositors — to protect these groups from losses in case of a bank failure.
Speaking at an event, the RBI deputy governor argued that having full insurance cover for deposits appears to be ideal for depositors and also helps to avoid bank runs, but full coverage is associated with moral hazards and financial non-viability.
“We could also examine the possible economic viability of an alternate targeted insurance approach with full coverage for certain sections of the customers, like small depositors, senior citizens etc., or pools deposits of smaller depositors based on a careful evaluation of the constructs, costs and benefits of such an approach,” the RBI deputy governor said, speaking at the International Association of Deposit Insurers (IADI) Asia-Pacific Regional Committee International Conference held in Jaipur.
Full coverage typically means that the deposit insurer will reimburse the depositor for the full amount of their insured deposits, in the event of a bank failure. This aims to protect vulnerable groups and maintain confidence in the banking system.
Bank failures in the US last year, and subsequent bank runs by customers, led to a significant number of deposit insurers and authorities re-evaluating the appropriateness of the scope and level of coverage to minimise the risk of bank runs.
Speaking about public awareness, he said awareness of deposit insurance needs to be strengthened.
With the availability of round-the-clock banking services and the increasing influence of social media, the withdrawal of deposits has been enabled much faster than before.
“Sometimes, even a misinformation may lead to a frenzied reaction from the depositors.”
Citing a recent IADI-sponsored study, he said it is evident that public awareness of deposit insurance can decrease the propensity of depositors to run on their bank by 67 per cent.
“The deposit insurers must therefore take initiatives to increase awareness about deposit insurance, as educating depositors about deposit insurance can be of great help in restricting the instinctive response of depositors to rush and withdraw their deposits, which eventually helps in minimising the disruption to the financial system.”
By providing a financial safety net, deposit insurers contribute significantly to financial stability.
“It has become imperative for the regulators and the deposit insurers to realign their policies and regulations to enable banks to better manage and enhance their risk management capabilities, especially liquidity risk management,” the deputy governor said.
Today, deposit insurance remains the principal function of DICGC and the policy objective is to protect the ‘small depositors’ of banks from the risk of losing their savings arising from probable bank failures.
The aim is to increase the confidence of depositors in the banking system and facilitate the mobilisation of deposits to accelerate growth and development.
When the deposit insurance scheme was introduced in 1962, 287 banks were registered as insured banks, this number has gone up to 1,997 as of the end of March 31, 2024.
The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures principal and interest up to a maximum amount of Rs five lakhs. (ANI)
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