Union budget 2020 is finally here and Finance Minister Nirmala Sitharaman in her speech made a big announcement related to insurance cover for bank depositors to Rs. 5 lakh from the existing Rs.1 lakh. According to financial experts and analysts, this hike in deposit cover banking will hit the banks on the bottom line as banks will likely witness a setback of 0.5%-2% from the next financial year owing to a fivefold increase in the fixed deposits cover announced in the budget. According to industry experts, the impact would be high on public sector banks as private sector banks would find a way to offset operating costs. This depository update will create an impact on the profitability and the challenge would be more for biggies with a high deposit base.
What is an Insurance Depository Cover?
An insurance deposit is a protection cover against losses on bank deposits if a bank fails financially and has no money to pay its depositors. All deposits maintained by a depositor across all branches of a failed bank are clubbed together for the purpose for availing of the deposit insurance scheme.
The deposit insurance scheme covers all banks operating in the country, including the private sector, co-operative and branches of foreign banks in India. The scheme insures all categories of bank deposits, including savings, fixed and recurring deposits, and the deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a subsidiary of Reserve Bank of India.
Pre Budget 2020 Insurance Depository Norms
Talking about the previous rules of Reserve Bank of India (RBI), when a bank fails then each depositor was insured up to a maximum of Rs.1 lakh for both principal and interest amount. Currently, banks pay Rs.10 paise for every Rs.100 deposits insured RBI’s arm Deposit Insurance and Credit Guarantee Corp (DICGC). The insurance coverage of Rs.1 lakh was irrespective of the deposit held by the customers in the savings or fixed deposit account. And, has been in the force since 1993 when the cover was raised from Rs.30,000 to Rs.1 lakh. However, Rs.15 paise for every Rs.100 would be the maximum premium that can be charged to banks as per the existing DICGC norms.
What Banks Will Follow Post Announcement of Depository Cover Hike
Soon after the announcement made by the Finance Minister, the government came in action hence sent out a message that the banks will not pass on the hike in the form of premiums to its customers. During the interaction with the media, the Finance Secretary said banks cannot pass on the hike in premiums to its customers, according to the norms.
“The premium won’t go up substantially in any case and maybe hiked to 12-13 paise (per deposit of `100 a year),” he added.
A Challenge for Public Sector Banks
According to financial experts and analysts, it would be a challenge for public sector banks to deal with the increased cost as the hike in the deposit cover is much more than expected. The banks are left with no other choice but to absorb the costs due to higher deposit cover.
It would be interesting to see how banks will cope up with this situation and what necessary steps will take to come out from this hit.