India's bank deposit insurance is robust, but the procedures appear to be a throwback to the sixties
23-Mar-2023 •Dhirendra Kumar
A friend of mine runs a business with servers from two different companies. Both companies are from America; let's call them MBI and LLED. My friend was very impressed with LLED because whenever it broke down, a service engineer would come within a few hours and fix it. Once the server broke down at 1 am at night and by 4 am in the morning, it was fixed. What an awesome company. MBI, on the other hand, was not impressive. Years passed, and not even one amazing episode of heroic customer service occurred. In fact, people more or less forgot that there was an MBI machine running in the server room, and a lot of work was getting done on it.
Which is a better-regulated financial system, where the government rapidly takes decisive actions to save depositors' funds? Or one where no such action needs to be taken? Which of these two companies above reminds you of the US government's quick actions to stave off the collapse of an untold number of small and medium-sized banks? Certainly, the US government itself presented its actions, in its own words, as "...decisive actions to protect the U.S. economy by strengthening public confidence in our banking system." Of course, governments always speak very highly of themselves. Where the statement says 'strengthening public confidence,' it should actually say 'somewhat restore the shattered public confidence', which would be more accurate.
When this Silicon Valley Bank business started, it looked like a storm in a teacup with hardly any implications for anyone outside this bank's narrow customer base in one single sector, mostly in California. However, banking crises have a way of quickly going global. Fifteen years ago, there was a stage when we thought we were looking at a couple of mutual funds at Bear Stearns having some redemption issues and look what happened. Last week, markets around the world showed that everyone remembers 2008 vividly. Surprisingly, it also turned out that startups around the world who had funding from the US had money in SVB. There are apparently 450 such companies in India alone!
The US government's 'decisive' action ensured that no depositors lost money, either in SVB or in the other one that collapsed, Signature Bank. It also announced measures that would effectively provide 100 per cent protection to other banks that might follow. Before the current crisis, the deposit insurance limit in the US was 2.5 lakh dollars. Now, for all practical purposes, it is infinite because of the US government's fear of bank runs.
In India, the deposit insurance limit is Rs 5 lakh, having been raised from Rs 1 lakh three years ago. Rs 5 lakh is a lot of money, and data on the Deposit Insurance and Credit Guarantee Corporation (DICGC) website shows that 97.9 per cent of accounts are fully protected. However, when one looks at the proportion of total protected deposits, it turns out that less than half (49 per cent) of the total amount is protected. In practice, this probably means a large proportion of business deposits are not protected. If a bank fails, then a lot of its business customers would face problems, and some may themselves fail. This was the precise problem in SVB because the US government had to remove the limit on the protected amount. Clearly, the imperative for the regulator is not to let banks fail at all.
However, banks do fail, and if you go to the DICGC website, you will see that depositors of some four or five small cooperative banks are currently being asked to file claims for the insured amount. A last date for filing the claim is stated for each bank. Unfortunately, it seems that the process for this recovery in India is heavily bureaucratised and far inferior to the one in the US. In the US, people do not have to file a claim; the protected amount is just there in the existing bank account, usable in all the ways it used to be. Unfortunately, here, in the country that has created a world-best financial system like UPI, it seems that we are stuck in the sixties as far as this banking claim system goes. It's time this was fixed.