The government is considering increasing the insurance limit on bank deposits beyond the current ₹5 lakh, a move that could impact banks’ profitability, according to a report by rating agency ICRA.
Currently, deposits up to ₹5 lakh per customer are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which collects premiums from banks to protect depositors’ money if a bank collapses. However, if this insurance limit is raised, banks may have to pay higher premiums, affecting their profits.
Government Actively Considering a Hike
M Nagaraju, Secretary of the Department of Financial Services (DFS), recently stated that the government is “actively considering” increasing the deposit insurance limit. He mentioned that once the proposal is approved, an official notification will be issued.
His statement came shortly after the New India Co-operative Bank crisis, where the Reserve Bank of India (RBI) imposed restrictions, including suspending withdrawals and stopping loan disbursements. The failure of the cooperative bank may have prompted discussions on enhancing deposit protection, ICRA noted.
Impact on Banks’ Profits
ICRA estimates that an increase in the deposit insurance limit could reduce banks’ profits by up to ₹12,000 crore annually.
“The potential hike in deposit insurance limits, brought into focus after the recent cooperative bank failure, is expected to have a marginal but notable impact on banks’ profitability,” said Sachin Sachdeva, Head of Financial Sector Ratings at ICRA.
In 2020, the deposit insurance limit was raised from ₹1 lakh to ₹5 lakh following the Punjab and Maharashtra Cooperative (PMC) Bank crisis. As of March 2024, nearly 97.8% of bank accounts are fully insured under the current limit. However, in terms of total deposits, only 43.1% of the value is insured.
Potential Financial Impact
While the exact extent of the insurance limit hike is unknown, ICRA predicts that if the insured deposit ratio (IDR) increases from 43.1% to 47-66.5%, banks’ post-tax profits could decline by ₹1,800-12,000 crore per year.
This would result in:
- A reduction in Return on Assets (RoA) by 0.01-0.04%
- A drop in Return on Equity (RoE) by 0.07-0.4%
Additionally, an increase in the insured deposit base would lower the Reserve Ratio (RR)—the ratio of the deposit insurance fund to insured deposits. Under various scenarios, RR could fall from 2.1% to 1.5-2.1%, indicating a weaker financial cushion for banks.
Conclusion
The possible hike in deposit insurance is aimed at protecting depositors, especially in times of banking crises. However, it comes with financial challenges for banks, as they may have to bear higher insurance costs, affecting their profitability. While the government has yet to finalize the decision, its impact on the banking sector will be closely watched.
