Hike In Deposit Insurance Limit Could Affect Banks' Profit By Up To Rs 12,000 Crore Annually: ICRA

The current change is under deliberation after the New India Co-operative Bank was named in a money laundering scam resulting in the RBI placing multiple restrictions on the lender’s business.

The insurance limits were last raised from Rs 1 lakh to Rs 5 lakh in 2020.

Source : ABPLIVE AI

A jump in insurance limit on bank deposits could result in making a dent in the banks’ profit, ICRA said on Wednesday. The rating agency argued that if bank deposit insurance is increased over Rs 5 lakh, the decision will have a marginal but notable impact on the lender’s topline.

Sachin Sachdeva, Head for Financial Sector Savings, ICRA noted that this could end up costing the banks up to Rs 12,000 crore in profits, reported PTI. “The potential increase in deposit insurance limits, which has come under focus given the recent failure of a cooperative bank, is expected to have a marginal but notable impact on banks' profitability,” he added.

New India Co-operative Bank Scam

The agency noted that last time the insurance limits were raised from Rs 1 lakh to Rs 5 lakh in 2020 in the aftermath of the PMC Bank crisis. Notably, the current change is under deliberation after the New India Co-operative Bank was named in a money laundering scam resulting in the Reserve Bank of India (RBI) placing multiple restrictions on the lender’s business such as restricting customers from withdrawing funds from their accounts, among other things. 

In the aftermath, M Nagaraju, Secretary, Department of Financial Services said that the government is actively considering increasing the deposit insurance limit beyond the current threshold of Rs 5 lakh.

Current Bank Deposit Coverage

About 97.8 per cent of the bank accounts remained full covered as they were credited funds under the Rs 5 lakh threshold, as of March 2024. According to the deposits’ value, the insured deposit ratio (IDR) stood at 43.1 per cent as of March 31, 2024, the ratings agency noted.

While the exact increase in deposit insurance remains unknown for now, ICRA said, “The change in IDR adversely impacts banks' profits as they have to shell out more money as premiums. ...under various scenarios, whereby IDR increases to 47-66.5 per cent, the banks' profit after tax (PAT) could be adversely impacted by Rs 1,800-12,000 crore annually. This can lead to a moderation on return on assets (RoA) by 0.01-0.04 per cent and return on equity (RoE) by 0.07-0.4 per cent.”