Deposit insurance: Time for a complete overhaul

India needs root-and-branch reform of its deposit insurance system for banks. Risk-based premium payments would moderate risky lending and address the inequity that prevails

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The government is "actively considering" a hike in India's deposit insurance limit beyond the current 5 lakh, according to M. Nagaraju, secretary, department of financial services. This comment, made soon after the Mumbai-based New India Cooperative Bank was placed under a moratorium by the Reserve Bank of India (RBI), rakes up the issue of deposit insurance again. It was last raised when Punjab and Maharashtra Cooperative (PMC) Bank failed in 2019 and the Centre responded by raising the insurance cover from ₹1 lakh to ₹5 lakh per depositor. Bank failures are few and far between in India, thanks to state ownership of a large chunk of the sector and prompt action by its regulator, RBI. However, as the New India and PMC cases have shown, banks do fail from time to time. Cooperative banks, especially. Given the hardship caused to depositors, the case for deposit insurance is beyond dispute. But is raising the quantum of coverage the right answer? Instead, it may be time to go in for root-and-branch reform of the scheme, so that ev