Letter to BS: Deposit insurance cover needs to be hiked to Rs 10,00,000

This refers to “Running for cover” (October 22). This is the appropriate time to consider both a higher deposit insurance cover as well as a risk-based premium for deposit insurance. First, the present deposit insurance cover is too little. It needs to be hiked to Rs 10 lakh. Second, risk-based premium should be introduced, based on supervisory ratings for banks. In the case of foreign banks, the Reserve Bank of India should use its own ratings as well as obtain home country ratings through the mechanism of supervisory colleges. The ratings should be carefully worked out based both on on-site supervisory examination, off-site monitoring and market intelligence.

Third, more transparency should be introduced. The depositors need to know the risks involved in putting their savings as deposits in a bank that offers higher returns. The principle of risk returns needs to be fairly well communicated. One of the ways of doing so would be to make it mandatory for the depositors to pay a small part of the cost of premium for the enhanced deposit insurance cover. The time has come for cross-subsidisation of deposit insurance cover to end. Financially weak and poorly managed banks need to pay more premium. There should be a perceptible shift from the present policy of opaqueness in strengths and weaknesses of banking entities to greater transparency and communication of the risk-return principle.

Arun Pasricha, New Delhi

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