The Deposit Insurance and Credit Guarantee Corporation (DICGC) can usher in a differential premium system (DPS) for banks, based on their risk profile, following an amendment to the DICGC Act.
A sub-section inserted in the Act allows the corporation to increase the deposit insurance premium for a bank. Currently it charges a flat rate premium of 12 paise per ₹100 deposit.
According to the amendment, “the Corporation may, having regard to its financial position and to the interests of the banking system of the country as a whole, and with previous approval of the Reserve Bank of India (RBI), from time to time, raise the aforesaid limit of fifteen paisa per annum for every hundred rupees of the total amount of the deposits in that bank.”
Prior to the amendment, Section 15(l) of the Act had said: “…Provided that the premium payable by any insured bank for any period shall not exceed fifteen paise per annum for every hundred rupees of the total amount of the deposits in that bank at the end of that period…”
Empowering the DICGC
The amended DICGC Act replaces the “shall not exceed fifteen paise per annum for every hundred rupees” clause with “raise the aforesaid limit of fifteen paisa per annum for every hundred rupees”.
Though the corporation currently has a one-size-fits-all approach to collecting deposit insurance premium, the amendment empowers it to create a differential premium system based on the risk profile of banks.
The flat rate premium had been upped from 10 paise to 12 paise per ₹100 of assessable deposits since April 1, 2020, to mitigate the impact of the hike in insurance cover on the corporation’s Deposit Insurance Fund (DIF).
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DICGC, a wholly-owned subsidiary of RBI, had upped the limit of insurance cover for bank deposits fivefold to ₹5 lakh per depositor with effect from February 4, 2020.
D Krishna, former advisor and chief executive of the National Federation of Urban Co-operative Banks and Credit Societies, said the amended DICGC Act empowers the corporation and RBI to prescribe higher rates of premium for co-operative banks vis-a-vis commercial banks.
Flat rate premium: The moral hazard
To address the moral hazard inherent in flat rate premiums irrespective of risk profile, DICGC is examining the recommendations of an internal committee on risk-based premium.
Of the total claims settled by DICGC since inception, around 94.3 per cent pertained to co-operative banks that were liquidated, amalgamated, or restructured, according to RBI.
As per the report of the RBI committee on DPS, the categories for assigning premium rates should be limited to four or five. Further, the ratings system, as far as possible, should be ownership-neutral.
DPS: Level playing field needed
Krishna observed that public sector banks, which have implicit government guarantee and/or backing, get recapitalisation support and private sector banks are not allowed to fail when they get into trouble as they are either revived or merged with another bank.
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In contrast, a number of urban co-operative banks have been liquidated as there was no support from any quarter.
“Therefore, it would be unfair for RBI to think of differential premium without having a level playing field or to allow DICGC to hike the premium just because the Act now permits them to do both,” Krishna said.
