Govt to allow insurance cover for upto 5 lakh of deposits

At a time when cooperative banks are failing and the rumours of weak banks spread panic in the industry, the government has decided to allow insurance cover for up to Rs 5 lakh of deposits from the current Rs 1 lakh, which will increase investor faith in deposits. However, the banks will require to pay a higher premium to the Deposit Insurance and Credit Guarantee Corporation.
“The proposal is a highly confidence-boosting measure and should support the deposit accretion of banks. However, given that the size of insured deposits is likely to increase, the deposit insurance premium paid by banks will increase the operating expenses of banks and will be negative for their profitability to the extent they are not able to pass it on to the bank customers,” said Karthik Srinivasan, SVP & Group Head, Financial Sector Ratings, ICRA Ltd.
As PMC Bank crisis emerged, the issue of deposit insurance came under the light, where the public came to know that Rs 1 lakh of their deposit was insured by banks. According to the annual report of DICGC, banks are currently paying Rs 100 per Rs 1 lakh deposit which translates into a cost of 0.1% on the deposit.