A steep increase in the insurance limit of fixed deposits may hurt the profitability of banks. The insurance limit has been increased from Rs 1 lakh to Rs 5 lakh as per the budget proposals. This could translate to an addition of about Rs 28,400 crore in insurance premium. The banks could explore the possibility of transferring the extra burden to customers but the government has already warned against such drastic measures.
The proposal may dent banks' profitability by up to 2 per cent, estimates show. Public sector banks with more accounts and more savings accounts may be particularly hit. Banks currently charge 10 paise for every Rs 100 deposited. The rate was increased by 2 paise to 10 paise in 2005.
An increase of insurance cover to Rs 5 lakh would only result in the addition of 2 or 3 paise, as per the hints dropped by the finance department. The banks have been directed to shoulder the increase. The deposit insurance scheme is run by the Deposit Insurance and Credit Guarantee Corporation under the Reserve Bank of India.
Though the government has sent out signals to the banks to bear the extra cost of deposit insurance, the banks are likely to do everything they can to pass on the burden to customers. About 61 per cent of the bank deposits in the country are below Rs 1 lakh, according to data compiled by the Reserve Bank of India. Almost 70 per cent is below Rs 2 lakh. Accounts with less than Rs 15 lakh constitute 98.2 per cent of bank accounts.
Deposit coverage sum is comparatively lower in India. Deposits in commercial banks that operate in the country, Indian arms of foreign banks, regional banks and RRB are covered under insurance scheme.
Insurance cover for deposits became a hot topic in India after the Punjab and Maharashtra Co-operative Bank was pushed into a credit crisis. Calls were raised for an increase in insurance cover for the deposits in the country’s banks.