Bank Deposit Insurance Hike :-Rating agency ICRA said that raising the insurance limit on deposits in banks beyond ₹ 5 lakh will have a minor but notable effect on their profitability.
Rating agency ICRA warned that raising the insurance limit on deposits in banks beyond ₹5 lakh will have a minor but noticeable effect on their profits. Under regulation by the Deposit Insurance and Credit Guarantee Corporation (DICGC), the amount a customer deposits into a bank now receives an insurance coverage of up to ₹5 lakh. By charging premium from banks, DICGC guarantees the protection of consumer deposits so that the money of the clients is safe should a bank file for bankruptcy.
The administration is mulling over raising the deposit insurance cap
Department of Financial Services Secretary M. Nagaraju recently claimed that the government is actively exploring expanding the deposit insurance amount beyond ₹5 lakh. He revealed this information in a press conference held in the presence of Finance Minister Nirmala Sitharaman on February 17.
He stated, “The issue of increasing the deposit insurance limit is under active consideration of the government. We shall officially notify the government as soon as it approves it.
Inquiries following the fraud involving New India Co-operative Bank
Nagaraju’s comment comes at a time when the New India Co-operative Bank fraud has lately come to light and following which the RBI has placed rigorous limits on the bank. These include a moratorium on making new loans, freezing withdrawal of money and dissolving the bank’s board.
ICRA claimed that the problem of New India Co-operative Bank significantly helped the government to give the matter top attention. The agency cautioned, meanwhile, that up to ₹ 12,000 crore would influence banks’ profitability should the deposit insurance cap be raised.
Likely influence on the banking industry
“The recent failure of New India Co-operative Bank has brought in focus the possible increase in deposit insurance limits,” stated ICRA’s Financial Sector Rating Head Sachin Sachdeva. The profitability of banks will be somewhat but significantly impacted by this.
The agency reminded us that following the PMC Bank crisis in February 2020, the deposit insurance limit rose from ₹ 1 lakh to ₹ 5 lakh. Less than ₹5 lakh in deposits and 97.8% of the nation’s bank accounts were totally protected by March 2024. By March 2024, the insured deposit ratio (IDR) however was at 43.1%.
Effect on bank earnings
Since the increase in IDR will require banks to pay more premium, it will have a direct impact on their profitability. ICRA claimed that ₹1,800 crore to ₹12,000 crore can influence the yearly profit after tax (PAT) of banks should the IDR rise to 47-66.5%.
Bank return on assets (RoA) might drop between 0.01 and 0.04%.
The range of return on equity (RoE) is 0.07–0.4%.
Drop in the RR, or deposit insurance reserve ratio
Decline in the deposit insurance fund and insured deposit ratio (Reserve Ratio – RR) will follow from increasing insured deposits of banks. Though it might drop to 1.5–2.1%, right now it is 2.1%.
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