The All India Bank Employees Association (AIBEA) on January 30 urged Union Finance Minister Nirmala Sitharaman to exempt public sector banks and other commercial banks from the purview of the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, citing that these banks do not pose a risk of collapse or liquidation.
In a letter addressed to the Finance Minister, AIBEA General Secretary C.H. Venkatachalam pointed out that commercial banks, particularly public sector banks, are required to pay a significant annual premium to DICGC despite the fact that no commercial bank has been liquidated since the introduction of key amendments to the Banking Regulation Act in the 1960s. He highlighted that Section 45 of the Act empowers the government and the Reserve Bank of India (RBI) to amalgamate financially distressed banks with stronger entities, thereby preventing closures and protecting depositors’ funds.
The letter noted that while deposit insurance was introduced in 1962 following a series of bank failures, including the collapse of Palai Central Bank Ltd. and Laxmi Bank Ltd., the banking landscape has since evolved, especially with the nationalization of major banks in 1969 and 1980. Public sector banks now enjoy sovereign backing, reducing the risk of failures and rendering deposit insurance unnecessary for them, AIBEA argued.
The association also raised concerns about the high premiums paid by commercial banks to DICGC. In the financial year 2023-24, commercial banks collectively paid Rs 22,543 crore in insurance premiums, while cooperative banks paid Rs 1,336 crore, bringing the total premium collection to Rs 23,879 crore. Despite these contributions, AIBEA pointed out that claims settled in the same period amounted to only Rs 1,436 crore, none of which involved commercial banks.
AIBEA emphasized that the disparity between the premium paid and the actual risk exposure has led to an accumulation of Rs 1,98,700 crore in the Deposit Insurance Fund, with total claims settled since the scheme’s inception in 1962 amounting to only Rs 5,359 crore, primarily for cooperative banks. Given this, the association contended that commercial banks should not be required to participate in the scheme.
Furthermore, AIBEA recommended that for cooperative banks, which are more susceptible to financial distress, deposit insurance should only be charged on the insured amount rather than on the total assessable deposits, which significantly inflates the cost of coverage.
The letter urged the government to incorporate these recommendations in the upcoming Union Budget, arguing that exempting public sector banks from deposit insurance and revising the premium structure for cooperative banks would help reduce unnecessary financial burdens on the banking sector. The move, AIBEA asserted, would allow commercial banks to retain more capital, improve profitability, and enhance their capacity to support economic growth.
The demand from AIBEA comes at a time when reports suggest that the RBI and the government are considering increasing the deposit insurance cover beyond the current Rs 5 lakh limit. The association warned that any such move would further burden commercial banks without any tangible benefit, as they are already safeguarded under the existing regulatory framework.
As discussions around deposit insurance reform gain momentum, the government’s response to AIBEA’s demands remains to be seen, with the Union Budget expected to provide clarity on the matter.