Hike in deposit insurance cover welcome, but more
deep-rooted reforms are needed (The Hindu)
Mains Paper 3: Economy
Prelims level: Deposit insurance
Mains level: Role of deposit insurance in an economy
- The decision by the Centre/RBI to substantially hike the insurance
cover for depositors in scheduled banks from ₹1 lakh to ₹5 lakh is a welcome
move that is likely to mend bruised public confidence in banks, lift
financial savings and level the unequal playing field between State-owned
banks and their private counterparts in their access to CASA deposits. =
- With the ₹1 lakh deposit insurance limit set way back in May 1993, the
impact of inflation and rising income levels had ensured that nearly 72 per
cent of bank deposits by value remained unprotected by end-March 2019.
- The five-fold hike in insurance limit now ensures that the lion’s
share of retail deposits by value are shielded from bank failures.
- This hike in insurance cover is positive no doubt, for it to truly
deliver better depositor protection, the Centre and the RBI will need to act
Three follow-up measures:
- Though deposit insurance in India covers banks with varying degrees of
risk (public sector banks have a zero failure rate, while many co-operative
banks fail each year), it is funded through uniform premiums levied on all
banks, irrespective of their financial position.
- This substantially reduces the utility of deposit insurance in India, is
the multi-year delays suffered by depositors in receiving claims from failed
- That results in many a slip between the cup and the lip for depositors,
is the lack of an orderly resolution process for commercial banks when they
are found to be short of assets to repay liabilities.
- In such cases, worries about systemic impact often prompt the RBI to try
out various jugaad modes of resolution, including shotgun weddings, which
prevent the expeditious liquidation of a troubled bank which then allows
deposit insurance to kick in.
- Such a resolution process was discussed in the shelved FRDI Bill.
But with a higher insurance cover in place, a resolution process for
troubled banks on the lines of the Bankruptcy Code for defaulting corporates
now brooks no delay.
Q.1) With reference to the Thwaites Glacier, consider the following
1. It is an Antarctic glacier flowing into Pine Island Bay, part of the
2. Along with Pine Island Glacier, Thwaites Glacier has been described as part
of the "weak underbelly" of the West Antarctic Ice Sheet.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
Q.1) What do you mean by the deposit insurance? What are the key measures are
needed to ensures reform in banking sector?