BY MS. SAKSHI SINGH
11th largest economy to 5th largest by 2024, India is all set to be in the TOP 3 global economies by 2027. India’s climb to the top has been a slow but steady one. A conservative economic approach has not only aided a steady rise, but also safeguarded the Indian economy against global market failures and run on banks. However, despite a steady approach, being a part of global economy India is also susceptible to global risks and financial contagion. The Depository Insurance and Credit Guarantee Cooperation aims to safeguard the medium to small depositors in the unfortunate event of bank crisis, the looming question is: IS IT SUFFICIENT?
Understanding Bank Failures
Bank Failure occurs when a bank is unable to fulfill their obligations to depositors and creditors, thus becomes insolvent. In this case the bank is ordered to close its operations by the regulatory body. As demonstrated by the US financial crisis of 2008, bank collapse is a contributing factor to devastating economic downturns. Recent instances of this include the near-collapse of Yes Bank in India, the U.S. failures of Silicon Valley Bank and Signature Bank, and the European failures of Credit Suisse.
Bank failure is mostly caused by two factors. Bank runs and bad foundations, such fraud, interest rate risk, or realized credit risk, can lead to bank failures. Throughout global crisis it is often highlighted how opaque bank balance sheets, keeps everyone in the dark until the impending financial doom breaks down the economy. Another issue that goes hand in glove with bank failures, is the too big to fail problem. Heavily distressed banks start to become malignant for the nation’s economic and financial system. This forces the government to intervene by pushing the boundaries of existing deposit insurance limits. Banks tend to keep following inefficient practices knowing full well that they will be bailed out, thus giving rise to moral hazard and frequent banking crisis in a nation.
Understanding Deposit Insurance (DI)
The common global practice of Deposit Insurance system is designed to offer a cushion for depositors and enhance stability within the financial system. Deposit insurance is a safety net for depositors, providing them with the assurance that they will be able to recover their money (or part of it) when the bank fails.
The Depository Insurance and Credit Guarantee Corporation (DICGC) provides Deposit Insurance in India with a maximum limit of INR 5 lakhs. DICGC is a subsidiary of the Reserve Bank of India.
Highlights and Future of Deposit Insurance in India
- In 2020, The amount of deposit insurance enhanced to 5lakhs from an earlier threshold limit of 1 Lakh only. With this, wider coverage is now being provided to the depositors.
- With this improved coverage, the Indian Government, along with the RBI, has enhanced the protection to its depositors, thus safeguarding the depositors and building greater trust in the Indian banking system.
- However, as India stands on the brink of ever greater Economic Expansion, the looming question is -does the current status of DI suffice? The nation’s formalisation and economic expansion will lead to increased bank deposits in the system, thus propelling depositors to demand higher coverage, according to M. Rajeshwar Rao, Deputy Governor RBI.
- Rao further suggests, that a periodic revision of depository insurance should be the way to go for the future changes in DI, thus including a progressive outlook to towards DI.
- The results of a survey conducted by the International Association of Deposit Insurers (IADI) indicate that 43.1% of the nation’s deposits are covered by deposit insurance. 97.8% of bank accounts are fully insured by the insurance framework as of March 31, 2024, which is more than 80% worldwide. Thus, placing India at a secure place in terms of DI.
- To duplicate the growth of Indian economy in its financial stability and boost depositor confidence, the RBI Along with DICGC, must pave way for more robust Deposit insurance structure. As seen recently with the collapse of credit Suisse, and the near fall of Yes bank, the need of the hour is a dynamic, shock-absorbing economic system, which includes strengthening of banks and a bouncier cushion of DI to fall back upon
Conclusion
An economic shift in one nation has a cascading effect on the ROW in today’s globalized world. Financial contagion is inevitable in the delicately entwined web of global economies. Only by creating stronger, more resilient systems can the blow be lessened. Leading B-schools, such as JIMS Kalkaji, that develops tomorrow’s global planners and leaders through PGDM and numerous undergraduate courses, provides students many opportunities to have deep discussions on current economic policy developments and encourage their opinions to extend their knowledge of the economy from books to the real world. In this way awareness is increased and future course of action is ideated and executed.
