MUMBAI: A proposed increase in the deposit insurance limit beyond Rs5 lakh could have a marginal but notable impact on banks’ profitability, rating agency ICRA said on Wednesday.
Currently, deposits up to Rs5 lakh per individual are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which collects premiums from banks to safeguard depositors in case of a bank failure.
However, the government is now actively considering a hike in this limit, Department of Financial Services Secretary M Nagaraju said on February 17, in the presence of Finance Minister Nirmala Sitharaman.
“The point about increasing insurance… that is under active consideration. As and when the government approves, we will notify it,” Nagaraju told reporters.
The discussions come in the wake of the New India Co-operative Bank scam, which led the RBI to impose restrictions on the lender, including a withdrawal freeze and board supersession.
Potential profit hit for banks
ICRA estimates that raising the deposit insurance limit could erode up to Rs12,000 crore annually from banks’ profits, as they would be required to pay higher premiums.
“The potential increase in deposit insurance limits, which has come under focus after the recent failure of a cooperative bank, is expected to have a marginal but notable impact on banks’ profitability,” said Sachin Sachdeva, head of financial sector ratings at ICRA.
The last revision in deposit insurance came in February 2020, when the limit was increased from Rs1 lakh to Rs5 lakh following the PMC Bank crisis.
As of March 2024, 97.8 per cent of bank accounts were fully covered under the current Rs5 lakh insurance cap. However, in terms of deposit value, the insured deposit ratio (IDR) stood at 43.1 per cent.
Depending on the extent of the hike, the IDR could increase to 47-66.5 per cent, leading to an annual PAT impact of Rs1,800 crore to Rs12,000 crore for banks, ICRA warned.
This could result in a moderation of return on assets (RoA) by 0.01-0.04 per cent and return on equity (RoE) by 0.07-0.4 per cent.
Impact on deposit insurance fund
A higher insured deposit base would also reduce the reserve ratio (RR) – the ratio of the deposit insurance fund to the insured deposit base. ICRA estimates that under various scenarios, the RR could decline from the current 2.1 per cent to 1.5-2.1 per cent.
While the exact quantum of the hike remains unknown, the banking sector will closely watch the government’s final decision, as it could significantly impact their bottom line.
