been a persistent demand from stakeholders and public representatives in the bis central bankers ’ speeches recent past for a hike in deposit insurance cover from the current level of ₹1 lakh. the deposit insurance systems around the world have evolved over time by reforms adopted by various jurisdictions based on experience, international developments, guidance from supra national bodies like imf, international association of deposit insurers ( iadi and other environmental changes from time to time. one of the basic principles of deposit insurance is that the deposit insurance system should cover at least 80 % of the deposit accounts and 20 – 30 % of the total assessable deposits. in india, we have surpassed this norm in a substantial way ; as on march 31, 2015, our dicgc ’ s deposit insurance covers as high as 92. 3 % of the deposit accounts and 31 % of the total assessable deposits. 18. therefore, before deciding on this demand, we have to factor in two major issues viz., the moral hazard issue and the risk based premium issue. deposit insurance inherently creates a moral hazard i. e. the parties to the deposit insurance viz. a bank and its insured depositors get an incentive to take more risk because the costs of risk, in whole or in part, are borne by others, generally a deposit insurance agency, in our case the deposit insurance and credit guarantee corporation ( dicgc ). most deposit insurance systems initially adopt an ex - ante flat - rate premium system because they are relatively simple to design, implement and administer. however, these systems were open to criticism in that they do not reflect the level of risk that banks pose to the deposit insurance system. flat - rate premium systems have also been viewed as being unfair as “ low - risk ” banks are required to pay the same premium as “ higher - risk ” banks. with no inbuilt incentive for “ higher risk ” banks to improve their risk profile, a flat rate system would accentuate the moral hazard problem. therefore the primary objective of most differential premium systems has been to provide incentives for banks to avoid excessive risk taking, minimise moral hazard and introduce more fairness into the premium assessment process. introducing fairness into the system bolsters industry support for deposit insurance. a hike in cover without calibrating the premium rates to the risk profile of the insured banks only exacerbates the moral hazard. recognising this, a committee on differential premium system for banks in india ( chairman : shri ja

area as well as in other oecd countries, with poorer households and young people being hit harder. 11 however, it is not the mandate of the ecb, or of any modern central bank, to address rising inequalities or to steer the distribution of income, whether between rich and poor or between lenders and borrowers. our mandate is to preserve price stability. this is our contribution to the efficient working of our market economy. in the current phase of the european business cycle, characterised by disruptions and fragmentation in euro area financial markets, our mandate is best served by tackling the malfunctioning of markets and ensuring a homogeneous and smooth transmission of monetary policy across sectors and countries. any re - distributional effect of our policies must be read as a means to an end that is price stability. 12 these effects are bound to be temporary, as such are the real effects of monetary policy interventions. in the long run, real rates are determined by natural economic forces, by productivity - enhancing public intervention and by the quality of our market institutions that are beyond the reach of monetary authorities. looking forward, the welfare of euro area savers will depend on efforts to reduce financial fragmentation by building a proper banking union, with its supervision and resolution arms, by strengthening euro area governance and by enforcing rules that ensure that member countries run sustainable policies. it will depend on efforts to lift productivity by investing in technologies and skills – more than on any decision the ecb has taken and will take in the future. thank you for your attention. see oecd, 2013. “ crisis squeezes income and puts pressure on inequality and poverty ”, new results from the oecd income distribution database, 15 may 2013. see my speech : “ monetary policy in a fragmented world ” delivered at the 41st economics conference of the oesterreichische nationalbank, vienna, 10 june 2013, http : / / www. ecb. europa. eu / press / key / date / 2013 / html / sp130610. en. html bis central bankers ’ speeches