Deposit insurance can’t handle large bank failures (The need to have bigger solutions for big bank failures in India)

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 Deposit insurance can’t handle large bank failures (The need to have bigger solutions for big bank failures in India)

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Read more on - Polity | Economy | Schemes | S&T | Environment

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• Hiking the deposit insurance limit: Even as individual deposit insurance limit was raised from Rs.1 lakh to Rs.5 lakh, the YES Bank collapsed in a few days, raising all round fears. But since SBI was brought in with a restructuring package, maybe the deposit insurance won't be needed.
• Failing co-operative banks: Over the decades, when any co-operative bank failed, regulators put them under moratorium, and waited for a resolution plan. Failure led to liquidation, and haircuts for depositors. The DICGC would pay Rs.1 lakh insurance amount per depositor. [DICGC - Deposit Insurance and Credit Guarantee Corporation of India]
• Big ticket failure: Not once has this method been used when any big bank was on the verge of failure. Why not? (a) Because of fear of trust in entire system, and (b) The small size of balance sheet of DICGC that cannot tackle large busts.
• Numbers of DICG: It remains a very small company, compared to the problem at hand. Its FY 2019 numbers are -

1. Revenues were Rs.19288 cr, of which premium income (paid by Banks) was Rs.12043 cr
2. Post tax surplus was Rs.11931 cr. 
3. Annual surpluses add up to making the Deposit Insurance Fund (payments are made out of this)
4. Size of DIF is Rs.97319 cr
5. DICG paid just Rs.37 cr for 15 failed co-operative banks
6. Total payout ever has been Rs.5117 cr (351 failed coop banks and 27 SCBs)
7. So just Rs.120 cr per annum, on average, ever!

• The size of problem at hand: Total deposits with SCBs in Dec 2019 were Rs.129 trillion, of which 65% was with public sector banks (rest with private). 

1. Average PSB has Rs.4.24 trillion, and average private bank has Rs.1.71 trillion deposits
2. YES bank had Rs.2.1 trillion deposits
3. Clearly, the DICGC's fund is totally insignificant compared to the size of the problem at hand

• What premium it charges: The DICGC charges 10 paise per Rs.100 of deposits, and has raised it to 12 paise recently. But it's useless given the problem it intends to solve, in case a big ticket bank fails.
• Three steps needed now: To make deposit insurance really work, these steps are recommended -

1. The small size of DICGC indicates that RBI perhaps thinks that a big size Bank won't be allowed to ever fail. That is good, but stress testing data of such banks can then be provided in RBI's annual FSRs (Financial Stability Reports)
2. Raise the level of deposit insurance premiums
3. In case things go bad, the DICGC will need more support from larger funds, like CFI (Consolidated Fund of India) or the RBI's contingency fund.

• Summary : The deposit insurance system of India is not designed to handle a real big bank failure, and it's time changes were brought.

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