FDs: RBI dy guv moots full insurance cover for seniors

Mumbai: RBI deputy governor M Rajeshwar Rao has mooted full insurance cover for bank

deposits of certain sections such as senior citizens and small depositors.

The deputy governor’s suggestion comes in the wake of these segments being the worst hit

in the case of cooperative banks’ failure. In the case of the Punjab and Maharashtra

Cooperative Bank, many of those whose deposits exceeded the Rs 5 lakh limit were senior

citizens who had kept their retirement funds with the cooperative for a higher return.

Besides senior citizens, some smaller investors who had parked their money in cooperative

credit societies, which in turn deposited cash with the failed bank, had also lost their

deposits.

Rao’s proposal was made in a speech at a conference organized by RBI’s subsidiary Deposit

Insurance and Credit Guarantee Corporation (DICGC) in Jaipur last week. At the same event,

deputy governor J Swaminathan had proposed risk-based pricing of deposit insurance.

Supporting this view on risk-based pricing, Rao said that flat pricing — which is the current

practice — is antithetical to the concept of insurance. “The primary objective of differential

premium systems is to provide incentives for banks to avoid excessive risk-taking, minimize

moral hazard and introduce greater equity into the premium assessment process. Keeping

this objective in view, many jurisdictions are transiting towards Risk Based Premium

(RBP),” said Rao.

Rao’s comment on full insurance cover for bank deposits was made in the context of failure

and near failure of banks in the US and Europe in 2023. “It does spark a debate on the

financial stability risk arising from a confluence of factors,” said Rao. While full insurance

cover was ideal for depositors to avoid bank runs, Rao said it is likely to be a ‘sub-optimal

solution’ as it would trigger moral hazard where lenders take undue risks as they do not

have to face the consequences of depositors exiting.

Bharat Pensioners Samaj