Banks may have to shell out 50% higher deposit insurance premium

NEW DELHI | MUMBAI: Banks may have to pay a higher premium to the Deposit Insurance and Credit Guarantee Corporation (DICGC) to get deposits up to Rs 1 lakh covered. At present, banks have to pay 0.10% as premium to get small deposits insured while the law allows DICGC ��� a subsidiary of the Reserve Bank of India (RBI) ��� to hike it to up to 0.15%. ���There is a strong case for increasing the flat rate premium for deposit insurance in order to increase the fund base,��� said an RBI official who didn���t want to be named.

According to current norms, all bank deposits of up to Rs 1 lakh are insured and DICGC is liable to pay the amount in case of any bank going bust.

An estimated 93% of all deposit accounts and 60% of assessable deposits are fully protected under the DICGC Act.
Assessable deposit is total deposit of the banking system minus deposits of foreign government, deposits of central/state government, inter-bank deposits and deposits held abroad.

Banks have to pay premium on these deposits, charged on a flat-rate basis. It is currently 10 paise per Rs 100 of assessable deposits. Earlier it was 5 paise per Rs 100 2003-04 and thereafter, 8 paise per Rs 100 of assessable deposits for 2004-05.

The DICGC Act stipulates that the investment of surplus funds can only be in central government securities.

The committee on financial sector assessment had suggested two steps for increasing the coffers of DICGC ��� either to charge risk-based premium or increase the flat rate. However, it had been observed that charging risk-based premium may discourage institutions like regional rural banks and urban co-operative banks from accepting deposits as these institutions are more vulnerable to risks compared to the scheduled commercial banks.

The RBI official said that there was an understanding that the RBI may go for increasing the flat rate premium initially while it may look at the option of prescribing risk-based premium once rural and co-operative banks are made competent enough to take on the competition.