Making bank deposits safer

The Union Cabinet’s decision to enhance insurance cover to `5 lakhs from the current limit of `1 lakh is a welcome move. It addresses an important lacuna in the Indian banking system which makes depositors suffer the consequences of imprudent decisions of the bank management

The ` 5-lakh insurance reportedly covers over 95 per cent of deposits in the banking system. The collapse of a few banks such as Punjab Maharashtra Bank, Yes Bank and Lakshmi Vilas Bank in recent times had brought a sense of urgency to take steps to protect depositor interest. Though the Reserve Bank of India (RBI) had protected the money of depositors in some cases, the moratorium imposed by the central bank denied depositors access to their hard-earned money.

The rescue of stressed banks, however, came at the expense of other banks, especially public sector banks which were forced to acquire the ailing lenders through mergers. While the forced mergers safeguarded the money of depositors, experts believe that this model is not sustainable when the government intends to gradually vacate the banking space.

The government had tried to bring in an institutional solution to bank crashes through the Financial Resolution and Deposit Insurance Bill in 2018. However, the Bill was withdrawn after an unprecedented backlash from people due to a bail-in provision, which allowed authorities to impound the money of depositors to rescue the ailing banks. The enhanced deposit insurance may allow the government to bring in bankruptcy law for financial institutions.

While the deposits in the public banks enjoy an implied sovereign guarantee, private sector banks could become vulnerable if the lending decisions are not prudent. With small and mid-sized private banks holding deposits worth over `15 lakh crores, the enhanced deposit insurance could help the depositor have a sound sleep without worrying about his money parked in the bank.