Ignore government ownership for PSBs' deposit insurance payout: RBI panel

MUMBAI: Government ownership of public sector banks will not be a redeeming factor while calculating premium for deposit insurance. A panel constituted by the RBI to move towards risk-based pricing for deposit insurance has said that implicit guarantee by the government should not be given any weightage in risk profiling of institutions for the purpose of deposit insurance.
Higher premium on deposit insurance will make it difficult for weak public sector banks to compete with stronger ones and this could be an additional factor supporting consolidation among public sector banks.
At present, all the banks pay 10 paise for every Rs 100 of deposits towards insurance to the Deposit Insurance and Credit Guarantee Corporation (DICGC). This is irrespective of the financial position of the bank. The premium so collected goes to a fund which is used to compensate depositors of a failed bank.
Currently, deposits up to Rs 1 lakh per individual are covered under deposit insurance. The Rs 1-lakh ceiling has been in place for several decades. According to the panel, although there have been persistent demands for hiking the limit, an increase in limit without calibrating the premium rates to the risk profile only exacerbates the moral hazard.
"Recognizing this, it has been felt that introduction of risk-based premium may be taken up to make ground for considering raising the insurance cover."
Most of the deposit insurance money has been going toward compensating customers of failed cooperative banks. The RBI's proposal for banks to move towards a risk-based pricing where the premium would depend on the soundness of the bank is also in keeping with international practices.
Earlier this year, a panel headed by Jasbir Singh, executive director, DICGC, was constituted to recommend the way forward. In its report released on Wednesday, the panel has said that while it appreciated the status of public sector banks which are perceived to have implicit government guarantee or backing, it was against any special status to them. This is contrary to the stand taken by credit rating agencies - both domestic and international - which give weightage to the government ownership while assigning a rating to public sector banks.
"The committee considered that internationally a preponderant view is that all safety-net tools should apply uniformly across all classes of institutions and the taxpayers' money should not be used in resolving any institution. In the similar vein, implicit guarantees in the form of government ownership should not be given weightage in risk profiling of institutions. The committee also took note of the fact that, over time, the government ownership of public sector banks may be diluted substantially. The committee therefore recommended that in all fairness, the rating system should, as far as possible, be ownership-neutral," the report said.