Consider direct payments, periodic review to enhance deposit insurance: RBI

Speedier settlement of deposit insurance claims by making direct payments to customers can boost coverage and lead to improvement in services, according to study by Reserve Bank of India (RBI) staffers. The country's deposit insurance system has evolved over the years courtesy an enhanced coverage limit and the deposit insurance fund.
 

Deposit insurance, which has been in existence in India for over 60 years, is crucial to the financial stability and protection of depositors. The system has been adopted by many jurisdictions in the world. There has been a steady expansion in its mandate, reduction in time taken for payouts, a move towards risk-based premium, and stability in the level of insurance coverage.
 

The article in RBI's June 2024 bulletin said the main issues facing the deposit insurance system were the revision in coverage limits, challenges from fintech developments, and climate change.


 

In India, deposit insurance is mandatory for all banks, including foreign banks. Currently, 1,997 banks are covered, comprising 140 commercial banks and 1,857 co-operative banks. This is the largest number of deposit-taking institutions covered by deposit insurance in the world, second only to the US.
 

On a by-account basis, the coverage ratio in India stands at 97.9 per cent, according to a speech by RBI deputy governor Michael Debabrata Patra at the meeting of the International Association of Deposit Insurers in Rome, Italy on June 14.  The current insurance coverage limit is Rs 5 lakh (about $ 6,000) per bank depositor.
 

The RBI article said that the reserve ratio, which is the ratio of deposit insurance fund (DIF) to insured deposits, is expected to increase steadily in the near future.
 

To improve the Indian deposit insurance system, the article called for speedier claim settlement through direct payments to depositors, proactive treasury management by an apt mix of instruments, and reduction in interest rate sensitivity.
 

A periodic review of deposit insurance coverage and raising public awareness on deposit insurance through financial education and addressing gaps through suitable communication strategies were also important, it said.
 

The modernisation of physical and digital infrastructure was crucial for security and efficiency.