Due to the increased deposit insurance, small banks may get trust vote

The Union budget proposal to raise deposit insurance fivefold is expected to increase confidence in small private sector banks, small finance banks and cooperative banks, two industry officials said.

Against the backdrop of a shaky financial system and the recent collapse of the Punjab and Maharashtra Co-operative (PMC) Bank, the Union budget proposed to raise deposit insurance to ₹5 lakh per depositor from the existing ₹1 lakh. The greater cover is likely to assuage depositors and restore some faith in the financial system.

According to Anil Gupta, vice president and sector head of financial sector ratings at ICRA Ltd, the measure is expected to increase the deposits insured as a percentage of total deposits to around 40-50% from 28% as of FY19.

“I believe that this move will benefit the banks where depositor confidence is low and people kept only up to ₹1 lakh in such banks. Depositors could now put in a larger sum of money and possibly at higher interest rates also,” said Gupta.

Banks with relatively less depositor confidence typically pay higher interest rates to attract funds. For instance, while State Bank of India and HDFC Bank pay 6.1% and 6.3% interest rate, respectively for a one-two year deposit, Suryoday Small Finance Bank and AU Small Finance Bank pay 8.25% and 7.5-7.63%, respectively on deposits of the same tenure. The general public perception is that state-owned banks, notwithstanding their risk profile, have a sovereign guarantee on deposits.

“The increase in deposit insurance cover to ₹5 lakh makes deposit insurance to per capita (income) in India, one of the highest after Brazil and the US. This will bring back trust in cooperative banks, although we expect it will be only the proposed reforms in regulation of cooperative banks that will make the circle complete,” said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India.