Michael Debabrata Patra: New vistas in deposit insurance in India
Keynote address by Dr Michael Debabrata Patra, Deputy Governor of the Reserve
Bank of India, at the 79th Executive Committee Meeting of the International Association
of Deposit Insurers (IADI), Rome, 14 June 2024.
* * *
Good morning to you all!
I am deeply honoured to participate in the 79th meeting of the Executive Council
(EXCO) of the International Association of Deposit Insurers (IADI). At the outset, I
would like to express my profound appreciation for the IADI as a global standard-setter
as well as an international forum for the cross-fertilisation of information and country
experiences on practices and techniques relating to deposit insurance. The IADI is
contributing significantly to building effective deposit insurance systems across the
world, thereby strengthening public confidence in the banking system and ensuring
financial stability.
Before I begin my talk, I am happy to inform you that the Deposit Insurance and Credit
Guarantee Corporation (DICGC) of India, in collaboration with the IADI and the Asia
Pacific Regional Committee (APRC), would be hosting an international conference with
'Evolving Financial Landscape: Emerging issues for deposit insurance and the
importance of crisis preparedness' as its theme during August 12 to 14, 2024 in Jaipur
in the western state of Rajasthan in India. Jaipur is a world heritage city and is also
known as the pink city due to the dominant colour scheme of its buildings. On behalf of
the DICGC, I extend our invitation to the conference to all members of IADI. We look
forward to welcoming you to India and to Jaipur soon.
In the recent period, India has been in the forefront of designing and implementing a
pro-active deposit insurance (DI) framework that shields small depositors of banks from
financial distress on account of bank runs or failures. Accordingly, the theme of my
address is the recent set of policy initiatives undertaken in India for designing a strong
safety net for depositors. The subject assumes considerable importance and topicality
in the context of the bank failures in some jurisdictions in March 2023 that have posed
new challenges for the conduct of monetary policy as well as for prudential regulation
and supervision. The swift and decisive responses of deposit insurers (DIs) and
regulators to quell the turbulence and contain contagion are redefining the landscape
for resolution and deposit insurance in the pursuit of financial stability.
II. Deposit Insurance in India in a Cross-Country Setting
Let me begin by providing a brief historical context for the establishment of the DICGC.
The idea of deposit insurance was shaped by intermittent bank failures between 1948
and 1960. A Deposit Insurance Act was promulgated by Parliament in 1961 to set up
the Deposit Insurance Corporation (DIC), a wholly owned subsidiary of the Reserve
Bank of India (RBI), the country's central bank. It was merged with the Credit
Guarantee Corporation of India and renamed as the Deposit Insurance and Credit
Guarantee Corporation (DICGC) on July 15, 1978 with the mandate of "insurance of
deposits and guaranteeing of credit facilities and for other matters connected therewith
or incidental thereto".
III. Mandate
From its very inception, therefore, the Corporation was envisaged as a paybox plus1
institution. The credit guarantee function was discontinued in April 2003 and deposit
insurance became and remains the principal function of the Corporation. The resolution
function resides with the RBI as the regulator of the financial sector. Currently, the
paybox plus mandate is restricted to the provision of financial support in case of the
mergers. More recently, however, this mandate has been strengthened with
amendments to the DICGC Act in August 2021 which provides for up-front payouts
within stipulated timelines. This provision is unique among deposit insurers. The
Corporation is now liable to make payment to depositors of a bank facing solvency
stress up to the deposit insurance limit within 90 days of the bank being placed under
regulatory directions that restrict it from discharging its liabilities, i.e., even before
liquidation and amalgamation. The insured bank has to submit the depositors list within
45 days. The Corporation has to get the genuineness and authenticity of the claims
verified within 30 days and pay the depositors who have submitted their willingness to
receive the same within the next 15 days. In case the RBI finds it expedient to bring a
scheme of amalgamation/ compromise or arrangement/reconstruction, the liability of the
Corporation will get extended by a further period of 90 days.
Globally too, the mandates of DIs have expanded significantly, with the share of paybox
2
entities shrinking. By 2023, it was down to 17 per cent. Increasingly, DIs have been
vested with additional responsibilities, including for financing and resolution, in
recognition of their crucial role as participants in the national financial safety net.
Consequently, the share of DIs with paybox plus mandate has risen to 48 per cent (a
rise of 11 basis points in ten years), especially among advanced economies. The
3 4
shares of loss minimisers and risk minimisers have remained broadly unchanged.
IV. Coverage
It may be apposite at this juncture to set out some stylised facts about deposit
insurance coverage in India and how they compare with the global experience as
5
recently profiled by the IADI . In India, deposit insurance is mandatory for all banks,
including foreign banks. Currently, 1,997 banks are covered, comprising 140
commercial banks and 1,857 cooperative banks, which are small financial institutions
owned and controlled by their members and are community-focused in their operations.
6
According to the IADI's latest deposit insurance survey , this is the largest number of
deposit-taking institutions covered by deposit insurance in the world, second only to the
US. The current insurance coverage limit is INR 500,000 (approximately US$ 6000) per
depositor in a bank. Expressed as a multiple of nominal GDP per capita, this works out
to 2.9 times as against the global median of 3.3, but it compares favourably with
medians for paybox and risk minimiser DIs. On a by-account basis, the coverage ratio
in India at 97.9 per cent is in line with the global median and a little below the latter -
44.2 per cent as against 47 per cent globally - in terms of value of deposits.
V. Funding
Funding for deposit insurance in India is in line with the global central tendency under
which 96 per cent of DIs are funded by levying premiums on member institutions (64
per cent of pre-tax accretion to the fund). In addition, about 35 per cent of the accretion
to the deposit insurance fund (DIF) came from investment income in fiscal 2022-2023.
Unlike the growing practice worldwide of nearly half of deposit insurers levying
differential premiums incorporating additional risk measures - up from 30 per cent in
2010 - a flat rate premium of 0.12 per cent per annum is levied in India which has been
revised from time to time, keeping in view the adequacy of the Corporation's DIF. The
size of the fund, measured by its ratio to insured deposits, at 2.02 per cent is
comparable with the global median. The Corporation has targeted the achievement of a
ratio of 2.5 per cent by March 2028.
VI. Reimbursement
Reimbursement of insured depositors is the core responsibility of a DI, with the IADI
promoting a period of "within 7 days" as its Core Principle 15. There has been a
significant improvement globally in the speed of reimbursement, although meeting the
Core Principle has remained a challenge over the last decade. The global average
7
period for reimbursement to depositors has reduced from 28 to 14 days . Currently, the
DICGC's reimbursement takes about a month on an average. Factors that usually
impede fast reimbursement include data quality issues, identification of insured
depositors and depositors lacking an alternative bank account.
VII. New Vistas for Deposit Insurance in India
The March 2023 banking turmoil and its aftermath prompted policy makers to refocus
on design features of deposit insurance processes. In India, this has led to prioritising
risk management, especially during adverse market conditions, while benchmarking to
best international practices. This involves revamping risk management and internal
control systems, including contingency planning and crisis management frameworks, in
alignment with the IADI's 2020 Guidance Paper on "Risk Management and Internal
Control System of Deposit Insurers (DIs)". In the context of the DICGC's portfolio
valued at US$ 24.5 billion, treasury operations are being reinforced with asset-liability
management tools, real time monitoring of liquidity and concentration ratios, and
periodic value-at-risk and scenario analyses at various confidence levels. A dedicated
market risk reserve has also been created. Some risk management measures like
market borrowing, liquidity support from central bank/government, etc., may necessitate
changes in statutory provisions.
Simultaneously, public awareness campaigns are being refashioned and stepped up.
Driven by a Board approved communication policy, public awareness about deposit
insurance is being nurtured through continuous dissemination of deposit insurance
related information. All insured banks are required to display the DICGC Logo and QR
code linked with the DICGC's website on their own websites and internet banking
portals. The Corporation has also registered on a hyper-local social platform which
facilitates sharing of specific information on claim payments. Messages are also relayed
by structured mobile phone text. The website itself is being overhauled to make it more
customer-friendly in terms of search capability, information architecture, improved user
interface/experience, content strategy and user engagement, a progressive Web App
and the like.
Digital transformation of all operations is underway with a focus on data management,
process optimisation, business analytics and cyber security with best-in-class market
technologies. Straight through processing without manual intervention and seamless
integration of various modules are on the anvil alongside use of application
programming interfaces (APIs), and artificial intelligence. A standalone single customer
view application (SCVA) will reduce time lags in the submission of claims. An in-house
recovery dashboard enables tracking compliances, and authentication of asset details
and payments by liquidators.
VIII. Conclusion
Looking ahead, the evolution of the deposit insurance function is likely to confront more
complex challenges amidst heightened uncertainty. For instance, climate change is
emerging as an overarching risk to the global economy and financial systems.
According to the IADI's surveys, 60 per cent of DIs have formalised Environmental,
Social, and Governance (ESG) policies and some are members of the Network for
Greening the Financial System (NGFS). This is what is keeping us awake in India -
framing a comprehensive ESG policy incorporating elements of climate sustainability,
investment in sovereign green bonds, measuring the impact of climate change on
default risk and contingency planning for climate related extreme events via actuarial
analysis. We are exploring appropriate coverage for green deposits, climate risk based
differential premiums and ex ante funding needs for climate sustainability. These new
challenges will inevitably require effective coordination and information sharing between
DIs and other national safety net participants as well as with those in other jurisdictions.
Forums like this one will be the incubators of global coordination. The time to act is now.
Thank You.
Valuable comments received from Anup Kumar, Arun Vishnu Kumar, Aparna Bhatt
Dwivedi, and editorial help from Vineet Kumar Srivastava are gratefully acknowledged.
1
Additional responsibilities in resolution beyond reimbursement such as contributing to
financing, operationalising, and/or decision-making in resolution.
2
Limited to premium levying and reimbursing depositors.
3
Deposit Insurers actively engage in a selection from a range of least-cost resolution
strategies.
4
Deposit Insurers have comprehensive risk minimisation functions that include risk
assessment and management, a full suite of early intervention and resolution powers,
and in some cases prudential oversight responsibilities.
5
IADI: "Deposit Insurance in 2024 - Global Trend and Key Issues", IADI, April 2024.
Global Survey on Deposit Insurance and Financial Safety Net Frameworks, IADI,
2022.
7
The proportion of DIs starting reimbursement within seven days doubled to around 60
per cent, with 70 per cent of European and Americas DIs commencing pay-outs within
seven days followed by almost 50 per cent of African DIs and 40 per cent of Asian DIs.