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Budget 2020: Insurance on bank deposit hiked to Rs 5 lakh; may impact bank’s profitability

NEW DELHI: To create confidence among depositors that their money is safe with commercial banks, Finance Minister Nirmala Sitharaman in her budget speech proposed to hike the bank deposit insurance in scheduled commercial banks to Rs 5 lakh per depositor from the current Rs 1 lakh.

The proposal, however, may impact portability of banks, said experts.

The long-overdue move comes only several incidents, the prominent being a fraud of Rs 4,355 crore unfolded at the Punjab and Maharashtra Co-operative (PMC) Bank, created a sort of panic among investors. The FM, however, said that there is robust mechanism in place to monitor the health of all scheduled commercial banks and all depositors money is absolutely safe in the country.

Experts welcomed the move and said it is a highly confidence-boosting measure. “The proposal to increase the deposit insurance coverage and assurance on safety of depositor money in a scheduled commercial bank is a highly confidence-boosting measure and should support the deposit accretion of banks,” said Karthik Srinivasan, SVP & Group Head, Financial Sector Ratings, ICRA Ltd.

Care Ratings in its budget analysis said that the increase is beneficial to the deposit holders and is generally in line with inflation as the limit was last increased in 1993.

However, experts believe that the new announcement may impact the financial health of the banks as the increased cost will be borne by the banks.

“Given 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. As on March 31, 2019, 28 per cent of deposits (in value terms) and 92 per cent of depositors (in terms of number of accounts) were covered by deposit insurance, which is likely to increase to 40-50 per cent,” Srinivasan of ICRA said.

According to the RBI guidelines, deposits with all commercial banks and cooperative banks are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC). Primary Cooperative Societies, however, are not covered under DICGC. At present, DICGC charges 10 paise per deposit of Rs 100, which is entirely borne by the bank.

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