FRDI contemplating increase in deposit insurance cover: Report

New Delhi: Amid concerns being raised on bank deposits under the draft FRDI Bill, an SBI research report on Thursday said the proposed law is contemplating an increase in deposit insurance coverage from the current Rs 1 lakh.

The proposed 'bail-in' clause in the draft Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 has raised a lot of concern among depositors who are worried that they may lose their deposits with banks, the SBI Ecowrap report said.

"However, the truth is that the risk is much less in the proposed bill," it said.

Currently, DICGC provides deposit insurance of up to Rs 1 lakh and rest of amount is forfeited in the rare event of a bank failure.

The report said that data on Cross Country Deposit insurance Coverage limit shows that Deposit insurance coverage in India is one of the lowest at Rs 1 lakh/USD 1508 /0.9 times India's per capita income.

"Even if we apply the average of how many times it is of per capita income across countries, the deposit insurance coverage rises to Rs 3.5 lakh. The FRDI is contemplating an increase," the Ecowrap said.

It further said that while, the FRDI Bill has not specified the insured amount yet, but "definitely it would be higher" than the current limit of Rs 1 lakh.

Prime Minister Narendra Modi had yesterday said that the government was working to protect the interest of bank customers and their deposits, seeking to dispel the rumours regarding the proposed FRDI Bill.

The draft law, which was introduced in the Lok Sabha in August, is undergoing scrutiny by a joint parliamentary committee.

The report further said that as per the latest data available (March 2016) the average balance per term deposits account is Rs 2.54 lakh, while the overall average balance (including Savings Bank, Current Account and Term Deposit) is only Rs 58,316.

Out of the term deposits accounts, 67 percent of the total accounts are of less than Rs 1 lakh, which holds only 8.6 percent of the term deposts in value.

"Thus, any banks hypothetically fail, then it would not affect the small depositors at all, which are mostly covered through insurance.

"On the other hand, the term depositors of above Rs 15 lakh is only 1.3 percent, who holds 55 percent in terms of amount of the total term deposits of the banking system," the report said.

The report went on to say that in India bank failure is almost non-existent. Till now the claims from DICGC is very few and mostly, such claims have raised only due to failure of a few cooperative banks.

"One reason often cited for this is that banks in India largely fund themselves through retail deposits rather than wholesale funding, which has often been identified elsewhere as a source of vulnerability to external contagion in other countries," Ecowrap added.

The Bill proposes to create a framework for overseeing financial institutions such as banks, insurance companies, non-banking financial services (NBFC) companies and stock exchanges in case of insolvency.

The 'Resolution Corporation', proposed in the draft bill, would look after the process and prevent the banks from going bankrupt. It would do this by "writing down of the liabilities", a phrase some have interpreted as a "bail in".