The limit has remained static since then. A rule-based determination of the coverage limit has been difficult. However, there are two ‘thumb rules’, which provide some objectivity for setting the coverage level.
Rule 1: On an average, the coverage level should amount to twice per-capita GDP. Rule 2: Fully cover 80% of the number of depositors, but only 20% of the value of deposits. This is commonly referred to as the ‘80-20 rule’. Let us apply these two rules to the current Indian conditions to determine the coverage limit.
During 2018-19, the per-capita GDP stood at Rs 1,42,719 (provisional estimates). At Rs 1,00,000, the current coverage limit was 29.9% below this figure, indicating under-coverage. An international comparison also reveals the under-coverage. As per the 2018 International Association of Deposit Insurers Survey, in terms of the coverage limit/per-capita GDP ratio, India was positioned 102nd out of 115 countries with the ratio at 0.81. Among the 21 lower-middle-income group countries to which India belongs, India was positioned 16th. Further, India’s ratio declined serially from 2003 onwards.
In this respect, the Report of the Committee on Financial Sector Reforms 2009 had recommended holding the limit of Rs 1,00,000 per person until the per-capita GDP exceeded Rs 1,00,000. Then, the percapita GDP was below Rs 50,000. A decade has elapsed since then, and the ‘constant’ coverage limit has considerably dipped below the per-capita GDP.
Similarly, RBI’s 2011 Report of the Committee on Customer Service in Banks had recommended a drastic increase of the cover to at least Rs 5,00,000, so as to encourage individuals to keep all their deposits in a bank convenient for them. Thus, it is imperative that the coverage limit be increased.
Application of the rule would yield a revised monetary coverage of nearly Rs 2,85,000. Therefore, the current limit can at least be doubled to Rs 2,00,000. At Rs 2,00,000, the coverage limit would be 40.1% more than the per-capita GDP and 29.9% below the twice per-capita GDP, in 2018-19. This will not only increase the account- and amount-wise coverage, but also help mitigate the erosion in the real value of the existing coverage limit over time.
The present coverage limit provides full cover to 92% of the deposit accounts and 28.1% of the ‘assessable’ deposits (March 2019), and, thus, the position does not sync, to some extent, with the ‘80-20 rule’. However, the applicability of this rule is rather limited, and would be ill-advised in the Indian context.
One of the reasons for the relatively high incidence of fully covered accounts is the aggressive opening of small accounts, especially in rural and semi-urban areas, under the financial inclusion programmes. This will likely continue, as one-fifth of the adult population is still financially excluded, according to the World Bank index database, 2017.
Further, the number of multiple account holders has been rapidly increasing owing to several genuine reasons,& the trend is likely to continue.
Coming to the amount part, the addition of innumerable small accounts has, no doubt, led to growth in insured deposits, but at a rate much below that of ‘assessable’ deposits. By implication, the growth of ‘assessable’ deposits sourced from increases in balances of the relatively large household sector accounts.
As the coverage limit remained static, the increases in balances of the large accounts beyond the coverage limit added only to ‘assessable’ deposits, not to ‘insured’ deposits, thereby leading to the ratio of ‘insured’ deposits to ‘assessable’ deposits declining. Going ahead, as percapita income increases, and along with it bank deposits, the declining trend will likely continue — but, slowly, unless the coverage limit is drastically enhanced, which will push up ‘insured’ deposits.
In short, it is not likely that the coverage ratio by account as well as by value will come down fast to match the ‘80-20 rule’. Female depositors may be provided an extra 10-20% coverage over and above the prevalent coverage limit. This will encourage women to save regularly in banks.
Nevertheless, the coverage limit is required to be reviewed periodically, as the economic and financial landscape changes. Moreover, there is a need to balance depositors’ protection and depositor discipline on the insured banks.
The writer is former senior economist, State Bank of India