PMC Scam Effect? RBI Might Tweak Insurance Cover for Deposits

In the aftermath of the PMC Bank scam, which left money of thousands of depositors in jeopardy, the Reserve Bank of India (RBI) has reportedly asked its subsidiary Deposit Insurance and Credit Guarantee Corporation (DICGC) to create a "risk-based system for collecting premiums from banks to cover the deposit insurance of customers".

DICGC insures all deposits such as savings, fixed, current, recurring, and so on, of all commercial and co-operative banks.

The decision, if brought into effect, will change the way banks are charged premium by the DICGC and is expected to provide more cushion to customers of banks with “higher risks”, according to a report by Business Standard.

WHAT IS THE CURRENT SYSTEM?

Currently, each deposit in a bank is insured up to a maximum of Rs 1 lakh for both principal and interest amount. The money that is insured, in case of any failure, will be given to the customer after deducting his/her dues towards the bank, within two months from the date of liquidation of the bank.

However, the insurance provision will kick in only if the bank is liquified or merged.

Now, the premium for these insurances are paid by the concerned banks. DICGC collects a flat premium of 10 paise per deposit of Rs 100 from banks, under the existing system.

WHAT’S GOING TO CHANGE?

According to the Business Standard report, the central board of RBI in a meeting, recently discussed whether banks could be charged a premium, depending upon their risk profile as against the flat rate.

In other words, a bank which the RBI feels is more likely to fail, will become liable to pay higher premium, as compared to a more stable lender.

The central bank reportedly views the move as a pre-requisite to hike the current deposit insurance limit of Rs 1 lakh.

The report adds that RBI's central board also discussed the prospect of charging different premiums for co-operative banks and commercial banks, as data suggests that between 2009-10 and 2018-19, only one of the 429 claims pertained to a commercial bank and the rest were meant for co-operative banks.

(With inputs from Business Standard)