RUNNING FOR COVER

Risk-based premium for deposit insurance is an idea whose time has come, but it will be tough to get a buy-in, writes Raghu Mohan

The fiasco at the Punjab and Maharashtra Bank (PMC) is a reminder that you need not have to fare badly in a poll to lose your deposit; nutty bankers can make this happen.

The late Jagdish Capoor, a former deputy governor of the Reserve Bank of India (RBI), made a case for paying a higher premium on the insurable deposits per account holder to the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) based on the risk profiles of banks. In the aftermath of the PMC Bank mess, the deposit insurer has taken up the issue, and is to present a blueprint at the next central bank board meet (to be held before the end of the calendar year). Now, will the authorities bite the bullet?

“The shift to risk-based premium (RBP) is ideal. But it is not going to happen anytime soon. And in any case, the perfect is the enemy of the good”, says Nilesh Sathe, former board member of the Insurance Regulatory and Development Authority of India. “The RBP is important as it will take into account the underlying business model of banks”, notes Bhavik Hathi, Managing Director (Financial Services) at Alvarez & Marsal (A&M). How high should the RBP be? “It should not be so high that it becomes costly for the banks. We can look at something on the lines of what the Federal Deposit Insurance Corporation does in the US,” adds Hathi.

One size doesn’t fit all

As on date, banks pay a flat premium of 10 paise for every ~100 held by them as deposits; if a bank goes belly up, you get paid ~1 lakh as an account holder. What you now have is a system where there is little appreciation of the risk a bank carries; and, in effect, weaker banks (largely the cooperative banks) are subsidised by the better ones.

The RBP was not a one-off mention in Capoor’s report (1999); it was later raised by the `Committee on Credit Risk Model (2006)’ set up by the DICGC; and the Jasbir Singh Committee (2015) on ‘Differential Premium System for Banks’. Incidentally, the Singh Committee was set up after the issue of RBP was discussed at the central bank’s board meeting held on October 16, 2014. And it was decided that “DICGC could explore the possibility of putting in place a differential premium within the cooperative sector, linking it to governance and risk profile of co-operative banks”.

Again, while the various Committee reports so far on deposit premium are now being seen in the context of co-operative banks, there is nothing in them to suggest it should be so — they were basically generic.

We are in uncharted territory. If RPB kicks in, there will be a shakeout among urban-cooperative banks (UCBS). While you may say this is desirable, it is unlikely the rethink is to stop with these banks. Just how will it be fixed for banks under the prompt corrective action (PCA) framework? Or for banks not under the PCA, but with a huge amount of dudloans (and maybe on their way to PCA)?

Is it to be extended to deposittaking non-banking financial companies which have no deposit cover at all as on date? How is the central bank going to bring in foreign banks into the RBP fold — it doesn’t have access to the inspection reports of these banks’ home-office regulators; after all, a blowout in some other jurisdiction can affect their India operations as well.

How do you make it work?

Then, letting the world know which bank is good, bad, or ugly and linking RBP to the same brings in another set of issues even though you have consensus that the system as it holds today has to give way.

“The big fear is that people will come to know which bank is weak if the premium to be paid by banks based on the RBP framework is made public”, says Yerrum Raju, former Dean of the Administrative Staff College of India. He is categorical that “the current cap of ~1 lakh on the deposit insured is too low; and should have been raised long ago”. We will touch on this aspect later.

The central bank’s senior decision-making levels had discussed the confidentiality aspect; it was decided that “the rating process and results, within DICGC should be managed with due care of confidentiality’’, and that only the rated bank should know this..

Says a former central banker who disagrees with this view: “You (the central bank) will give confidential ratings. If the depositors are to be in the dark about it, of what use is it? Poor depositors will continue to put money in these weak banks, and the banking regulator can be happy with the fact that it knows which are the weak banks! What kind of logic is that?”.

Then, confidential or not, it is the worthiness of the ratings which matters. The RBI’S Report on Trend and Progress of Banking (2017-2018), says 1,551 UCBS were rated from `A’ (highest) to the ‘D’ (lowest). In FY18, there were 328 of them in category ‘A’, 878 in ‘B’, 278 in ‘C’ and 67 in ‘D’. The share of UCBS with rating ‘B’ went up steadily since FY15 and those with the lowest rating (‘D’) fell over the years.

“Now, what if these ratings (for argument’s sake) are used to say that PMC Bank is not to pay a higher premium under the RBP regime? After all, it was rated ‘A’ by the central bank based on its annual inspection”, says Vishwas Utagi, convenor of the PMC Bank Depositors’ Association. What Utagi will not say is that if such ratings are strictly done, UCBS will have several banks which are not in this genre for company!

What may be up for review is a shift to the “per depositor” concept of deposit insurance from the "per deposit". Many hold deposits in the "same right and capacity" within a single bank through joint accounts. The Capoor committee was seized of the matter, but the problem back then was how do you monitor and enforce. With Aadhaar in place, and the huge strides made in data mining, this should be a concern.

So, the idea of co-insurance of deposits with a second agency (or DICGC plus).

The last reset of deposit insurance was on May 1, 1993 after the Bank of Karad went down in the securities scam of 1992 (the reset prior to this at ~30,000 was given effect to on July 1, 1980).

As for holding on to the total insured ceiling of ~1 lakh, the central bank has never given a reason, but the Capoor Committee had observed that the ratio of deposit coverage in India (at 6.1 times the per capita GDP) in 1999 was one of the highest in the world. And the International Monetary Fund’s thumb rule is this should be one, or two times per capita GDP.

At the time of the last revision, the deposit insurance cover worked out to $2,355 and the per capita was $387; the per capita in 2019 is $1,709.

Come December, you will have the blueprint for new deposit insurance scheme. And yes, Woody Allen was right: “There are worse things in life than death. Have you ever spent an evening with an insurance salesman?”