Private sector banks will be the biggest gainers of the government’s decision to hike deposit insurance cover to Rs 5 lakh from Rs 1 lakh in the Union Budget. However, the higher insurance costs, estimated at Rs 28,400 crore, will be borne by the entire banking system. According to Credit Suisse, the estimated increase in deposit insurance premium would be around Rs 28,400 crore ($4 billion) for the system, which is likely to be passed on to banks’ customers.
Nearly all of the claims paid by the Deposit Insurance and Credit Guarantee Corporation (DICGC), the RBI arm which insurers deposits, has been in respect of co-operative banks. While private lenders have failed in the past, they were merged with stronger banks, by using moral suasion in some cases.
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Although co-operative banks have been failing frequently, the deposit cover is unlikely to give them enough leverage to expand their base as most of them are regional. On the other hand, private banks now have a pan-India reach and have often risked a run on the bank following rumours. Meanwhile, public sector banks, including those that have posted losses for 10 successive quarters and reported a high percentage of NPAs, have never seen a flight of deposits. Even when the RBI placed half of the nationalised banks under prompt corrective action (PCA) framework, depositors never pulled out funds as they were convinced of government support.
Source: Economic Times
