Deposit Insurance coverage should range between Rs 5.2 lakh and Rs 21 lakh: CareEdge

India’s deposit insurance coverage should ideally be set between Rs 5.2 lakh and Rs 21 lakh, according to a report by CareEdge Ratings. The agency arrived at this range after modelling alternative approaches to determining the optimal level of deposit protection.

Currently, India’s deposit insurance threshold stands at Rs 5 lakh, a level that remains comparatively lower in US dollar terms when benchmarked globally. As of March 31, 2024, insured deposits in the country stood at Rs 94.1 lakh crore, covering 43.1% of all assessable deposits, while the share of protected accounts remained at a high 97.8%.

The report also highlighted disparities in the existing deposit insurance framework. While all commercial banks and cooperative banks are covered under deposit insurance, non-banking financial companies (NBFCs) accepting public deposits remain outside its ambit. As of March 2024, 1,997 banks were registered as insured institutions under the scheme.

A significant point of concern raised by CareEdge is the uniform flat rate charged for deposit insurance premiums. Commercial banks currently pay a higher amount and account for a substantial 94.4% share of the total insurance premium collected in FY24. However, cooperative banks have disproportionately benefitted from insurance payouts, indicating an imbalance in the risk-reward structure of the current pricing model.

To address this, CareEdge has suggested adopting a risk-based pricing approach, which would ensure that insurance premiums are set according to the risk profile of the banks. Such a shift could enhance financial stability and create a more equitable system, aligning the cost of coverage with the risk exposure of different categories of banks.