Big news for common people. ICRA, the rating agency, mentioned that raising the insurance limit on bank deposits could have a small yet notable effect on banks’ profitability. Right now, individual customer deposits up to Rs 5 lakh are protected by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which charges banks a premium to safeguard customers’ funds in case a bank fails.
Government’s Moves
Recently, M Nagaraju, Secretary of the Department of Financial Services, indicated that the government is seriously looking into raising the deposit insurance limit beyond the current Rs 5 lakh. This statement comes in light of the issues surrounding New India Cooperative Bank. The Reserve Bank of India (RBI) has stepped in to halt new loans from this cooperative bank, freeze deposit withdrawals, and disband its board.
ICRA noted that the troubles at New India Cooperative Bank might have sparked talks about increasing the deposit insurance limit, but such a change could potentially cut banks’ profits by as much as Rs 12,000 crore.
Previous Increase in 2020
The last time this limit was raised was in February 2020, going from Rs 1 lakh to Rs 5 lakh following the PMC Bank crisis. ICRA reported that by the end of FY 2023-24, 97.8% of bank accounts were fully insured since their balances fell within the Rs 5 lakh limit. They also pointed out that the insured deposit ratio (IDR) stood at 43.1% as of March 31, 2024, based on deposit values. This shift in IDR negatively impacts banks’ profitability as they face higher premium payments.