FRDI Bill 2017: Banks to bear higher deposit insurance cost

When it rains, it pours. The old adage seems so true for the pin stripped bankers. The digitization threat from Fintechs is already costing them a bomb. The deteriorating asset quality has almost made (at least some of) them penniless. The schemes like Jan Dhan (zero balance account) are adding to their cost woes. And if that was not enough, the controversy over the new Financial Resolution Deposit Insurance Bill for not specifying the deposit insurance amount has created yet another room for bankers to bear higher cost.
 
If initial reports from Finance Ministry is to be believed, the deposit insurance amount under the new bill would be higher than the existing Rs 1 lakh amount. The banks are likely to bear a higher burden of the deposit insurance if the government and the Reserve Bank of India (RBI) decides to hike the deposit insurance limit from the existing Rs 1 lakh under the new Financial Resolution Deposit Insurance Bill 2017.
 
Each deposit (savings, current, recurring and fixed deposits) is insured up to a maximum of Rs 1 lakh with the Deposit Insurance and Credit Guarantee Corporation (DIGC). The deposit insurance premium is paid by the banks to the DIGC. Under the existing framework, the DIGC charges 10 paise per Rs 100 deposit. So for a Rs 1,00,000 deposit, the premium charges are Rs 100 per annum.
 
There are reports that government is considering hiking the insured limit from Rs 1 lakh. "Any hike in the insured deposit amount will be at a cost to the banking industry," says a banker. The new Financial Resolution Deposit Insurance Bill 2017 doesn't make any mention of maximum deposit amount to be insured. The bill says that the government in consultation with regulator (RBI) will specify the total amount payable by the corporation with respect to any depositor.
 
Experts say the insurance premium under the new market driven bankruptcy of banks and financial institutions should be higher than 10 paise per Rs 100 because the probability of a bank failure is higher as there is a no bail out by government. Secondly, the banks are now much more vulnerable because of competition, digitization, cyber security risks etc. The insurance rates haven't been revised since April 2005.
 
It may be pointed out that the government has come out with an institutional framework for dealing with bankruptcy of banks and insurance companies. This new framework would be something akin to newly operational bankruptcy code for corporate sector, which is currently facing teething problems. The new corporation will to deal with financial institutions which are on the verge of a collapse, work out a resolution plan by way of restructuring, merger, acquisition or eventual liquidation in a worst case scenario.