Bank failure is a reality, deposit insurance failure is a shame!

Reported by: |Updated: October 21, 2019

DICGC provides bank customers deposit insurance of Rs 1 lakh per bank. This was the insured amount in 1978 and has not changed over the last 41 years. At 8% interest per annum, a deposit of Rs 1 lakh in 1978 would be Rs 26 lakh today. Since the insurance limit is still stuck at Rs 1 lakh, the extent of erosion of deposit insurance speaks volumes about the apathy of the system and the pain of the common man. If Rs 1 lakh could buy you a certain kind of house in a locality city in 1978, will that same amount of money buy you even a toilet in that same house today?

Two solutions are possible. The first is simply to raise the insured amount, and to keep increasing it periodically. The second is to create a competitive market for such insurance that is available to both banks and depositors.

For educated customers, the second option surely makes good sense. But I feel that there should be a floor, of say Rs 3 lakh, so that the financially illiterate customer is protected. This amount can be higher, say Rs 5 lakh, for depositors living in tier 3 and smaller towns where bank branches are fewer and hence depositors have fewer choice of banks. The compulsory insurance coverage must not be raised too high because it then promotes illogical behavior among depositors of concentrating their savings in 1 or 2 banks, and thereby increasing their risks. Just as banks need to understand risks better, customers too need to understand risks better.

Ignoring risk and ignorance of risk are two of the biggest risks to banks and depositors.

Another important aspect of deposit insurance is speed. If motor, health and life insurance claims can be settled in days or weeks, why should deposit insurance take years? The problems that result from bank failures are now becoming problems of life and death. They also shut down many businesses that are otherwise stable. That naturally leads to job losses as well. Entrepreneurs and employees, both suffer. I hope RBI undertakes studies of how many companies were shut and how many jobs were lost due to bank failures.

I feel it would be fair if DICGC paid out depositors upto Rs 1 lakh within a week, and the balance amount over 1-3 months. Given that there is insurance in place, there is no justification for delayed payouts. When justice delayed is justice denied, how can India afford this?

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