NRIs jittery over safety of deposits in Indian banks
VERY LOW DEPOSIT INSURANCE AND LOW YIELDS MAKE IT LOOK RISKIER THAN EVER
The low level of deposit insurance provided to customers with savings in Indian banks is coming as a shock to non-resident Indians (NRIs).
The failure of Punjab and Maharashtra Co-operative Bank last month came as an eye-opener for many who keep a large share of their hard-earned savings either in term deposits or saving deposits with banks in India.
The Reserve Bank of India last month ordered PMC Bank, a large interstate cooperative bank, not to do any business for six months and capped depositor withdrawals at Rs1,000, (subsequently raised to Rs40,000) throwing the lives of thousands of depositors into disarray.
Deposit insurance ensures that the depositor gets a certain amount, before the bank pays other parties it owes money to during the liquidation process. The Deposit Insurance and Credit Guarantee Corporation of India offers deposit insurance up to Rs100,000. In essence the insurance amount is capped at a maximum fixed amount irrespective of the size of the deposits held by customers.
Even by Asian standards, India is far behind in deposit insurance. The deposit insurance scheme of Philippines insures up to 500,000 pesos ($9,500) per depositor, while India’s coverage is a meagre $1,400.
Non-resident Indians (NRIs) who keep a substantial portion of their savings in fixed deposits in Indian banks are increasingly growing jittery over the safety of their deposits in the context of abysmally low deposit insurance and shrinking yield on bank deposits due to successive interest rate cuts.
The failure of Punjab and Maharashtra Co-operative (PMC) Bank last month has triggered the debate on the low level of insurance coverage for deposits held by the public in banks.
The Reserve Bank of India (RBI, the central bank) last month ordered PMC Bank, a large interstate cooperative bank not to do any business for six months and capped depositor withdrawals at Rs1,000, (subsequently raised to Rs40,000) throwing the lives of thousands of depositors into disarray.
The crisis has highlighted the low safety of depositors in Indian banks. Although the cooperative bank has not gone into liquidation, the risk to depositors’ money remains a concern.
Deposit insurance ensures the depositor gets a certain amount, before the bank pays other parties it owes money to during the liquidation process. The Deposit Insurance and Credit Guarantee Corporation of India (DICGC), a subsidiary of the RBI offers deposit insurance up to Rs100,000. In essence, the insurance amount is capped at a maximum fixed amount irrespective of the size of the deposits held by customers.
The PMC Bank debacle has brought back the focus on deposit insurance and depositors’ protection. While the government is reportedly considering the raising of insurance amount, fixed deposit investors and people keep significant amount of their savings in banks are increasingly worried about the safety of their money.
Reminders of risks
Last week, a leading Indian private sector bank, HDFC Bank, had to issue a clarification with reference to an image of a passbook bearing a stamp of deposit insurance cover being circulated on social media.
The image that surfaced on social media showed an HDFC passbook with a stamp claiming deposits in the bank up to
Rs100,000 is insured. This created panic among customers as people began sharing the image on all platforms. HDFC Bank later clarified that the information was according to RBI circular on June 22, 2017.
Insurance debate
Insurance protection on deposits in India is one of the lowest in the world. A recent report by the State Bank of India (SBI), a leading public sector bank, highlighted the inadequate depositor protection.
According to the SBI report, in India, while deposits are insured up to Rs100,000 ($1,400), the number for countries like Brazil and Russia stand at Rs4.5 million and Rs1.2 million, respectively.
Even by Asian standards, India is far behind in deposit insurance. The deposit insurance scheme of Philippines insures up to 500,000 pesos ($9,500) per depositor, while Thailand insures close to 5 million bahts ($160,000), according to respective central bank websites. In China, this insurance is for up to 500,000 yuan ($70,000) per depositor. According to the report, while 75 per cent of the bank deposits were covered under insurance in the fiscal year 1982, this dropped to 28 per cent in 2018.
RBI data show much of the incremental savings continue to flow into bank deposits. In 2017, bank deposits formed roughly 66 per cent of the net financial assets of households. What this means is that risk-averse people, like NRIs who choose bank deposits to park their life savings, could lose a large chunk of their fund in case of a bank failure.
“The DICGC coverage for term depositors of banks should be doubled,” said Soumya Kanti Ghosh, group chief economist
of SBI in the report. “There should also be a separate provision for senior citizens and retired people,” he added.
Panic is no option
India is a bank-led economy and banks command a large share of household savings. The public’s trust in banks in India is one of the highest in the world, largely because the sector has been historically dominated by public sector banks following the banks nationalisation in 1969. Additionally, bank failures have been rare in India.