THE GIST of Editorial for UPSC Exams : 14 February 2020 (Hike in deposit insurance cover welcome, but more deep-rooted reforms are needed (The Hindu))

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

Context:

• 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 swiftly on

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 banks.
• 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.

Way forward:

• 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.

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Prelims Questions:

Q.1) With reference to the Thwaites Glacier, consider the following statements:
1. It is an Antarctic glacier flowing into Pine Island Bay, part of the Amundsen Sea.
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
(c) Both
(d) None

Answer: C
Mains Questions:
Q.1) What do you mean by the deposit insurance? What are the key measures are needed to ensures reform in banking sector?