Hike in deposit insurance limit beyond Rs 5 lakh to impact banks' profits: Icra

A hike in insurance limit on bank deposits above Rs 5 lakh is expected to have a "marginal but notable" impact on lenders' profit, rating agency Icra said on Wednesday.

At present, deposits up to Rs 5 lakh by an individual customer is covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which collects premiums from banks for protecting customers' money in case a lender goes down.

Department of Financial Services Secretary M Nagaraju has recently said that the government is "actively considering" raising the deposit insurance limit beyond the current Rs 5 lakh.

"The point about increasing insurance... That is under active consideration. As and when the government approves, we will notify it," Nagaraju told reporters on February 17 at a press conference in the presence of Finance Minister Nirmala Sitharaman.

Nagaraju's comments came on the heels of a scam in the New India Co-operative Bank, which triggered RBI measures prohibiting the bank from issuing new loans, suspending deposit withdrawals and superseding the lender's board.

The rating agency on Wednesday said the recent failure of New India Cooperative Bank may have prompted the deliberations, but added that such a move could drill a hole of up to Rs 12,000 crore on banks' profit.

"...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," Icra's head for financial sector ratings Sachin Sachdeva said.

The agency recalled that the limits were last hiked to Rs 5 lakh from the earlier Rs 1 lakh in February 2020 in the aftermath of the PMC Bank crisis.

As of March 2024, 97.8 per cent of the bank accounts were fully covered because the sums credited in them were within the Rs 5 lakh limit, it said, adding that going by value of deposits, the insured deposit ratio (IDR) was 43.1 per cent as of March 31, 2024.

Noting that the exact quantum of the hike in deposit insurance is not known, it 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," the agency said.

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, it added.

The increase in insured deposit base would also lead to a reduction in ratio of deposit insurance fund to insured deposits base called reserve ratio (RR), it said, adding that the RR will fall to 1.5-2.1 per cent from the current level of 2.1 per cent under various scenarios.