When Yes Bank faced a scramble to withdraw deposits last March following a Corporate Scandal, I received an innocent query from a longtime friend, Will a bank depositor lose his money if the bank fails? I tried to assuage his fears with all the information I had, but wondered why I had never faced this query from anyone earlier despite my three and a half decades of banking experience. The answer was not far to seek. We Indians have been blissfully sheltered from the vagaries of bank failures, with the assumption that the state will stand behind all financial institutions in all circumstances. We get back our savings in the bank because of governments stamp of guarantee. But times they are a-changin and cases of bank failures are coming to the fore. The Yes Bank crises was the second banking scare to rattle Indian depositors in six months.
Are these instances a sign of weakness of India banking and finance sector? Certainly not because bank failure is a natural corollary of opening the system to market forces and competition. With new competition come new risks and challenges, and those who cannot cope with the new demands perish. America had early taste of this when nearly half the country 24,000 banks failed during the depression of the 1930s Deposit insurance was created after this crises with the intention to make bank failures less likely. Europe waited till the 1970s to adopt the schemes indemnifying savers from losses up to a certain level if their bank goes bust. China thought of starting a deposit insurance scheme only in November 2019, despite the widely held assumption that the state will stand behind all financial institutions in all circumstances.
India is one of the pioneers in the field since Deposit Insurance was first mooted in 1948 against the backdrop of the West Bengal banking crises, although the formal structure of deposit insurance came into existence in 1962, triggered by the crash of the Laxmi Bank and the Palai Central Bank. Well, India could have done without the system as the nationalisation of banking in 1969 brought an aura of infalibility to the government owned banks. Deposit Insurance and Credit Guarantee Corporation of India (DICGC) ambled along without much effort to reform it according to current needs. Meanwhile the world of banking was changing and the still waters on which Indian banks sailed were geeting turbulant.
Such a backdrop attests to the need for a thorough analysis on all aspects of the current deposit insurance system and prescription for making it robust and futuristic. Dr. Manas R. Das book amply proves that the subject is in the safe hands, as the author brings to bear his decades of research, hands-on experience and expertise on the subject. Dr Das has decades of experience in SBI, DICGC and as a member of study group of Ministry of Finance , RBI and DICGC. Having seen the mechanism of deposit insurance from ground zero his analysis of the weak points of the current system creates a sense of urgency for rule makers.His cogent argument convinces the readers why reforming the existing deposit insurance system (DIS) can no longer be on ice and serious rethinking on revamping of coverage of deposit insurance should shape the reforms.
One of the reasons why the existing deposit insurance system looks so antiquated is that no serious effort is made to modify policies to chime with the changing times. One such forgotten area is the approach to deposit insurance pricing. DICGC follows a flat-rate premium regime (presently Re 0.10 per Rs 100 of deposit) although the Act allows a variable premium system. Thus different types of depositors are clubbed under one category. There has to be reform on the extent of coverage to approximate the international standard of 80% and 20% by account and value respectively, which are much higher in India at present. Presently all banks are covered under insurance guarantee including cooperative banks. According to the author the blanket coverage is independent of the nature of business, size, strength and ownership of banks which seems illogical and unnecessary, and has become too anachronistic (page 203). Three banks namely SBI, ICICI and HDFC Bank have been declared as Domestic-systematically Important Banks, implicitly rendering them immunity against bank failure. Similarly Nationalised Banks owned by Gol are also in practice not-allowed-to-fail. Why should they incur additional cost in the forms of deposit insurance premium?
Of late Financial Resolution has been closely associated with deposit insurance system. However, the bill for creation of such system has fallen flat on the floors of the parliament because of one proposed recovery route of bail-in made in the bill. This method may lead to creditors of a bank sacrificing their investments in bonds for the survival of the failing bank. The system, although weird on the face of it, is a prefered system in the developed countries. But we Indians have been protected all along by the government: Why shouldnt it bail us out if our bank fails?
- Chinmay Kumar Hota