Is RBI in better shape among global Central bankers in insuring bank deposits?

Untimely demise of Swiss financial giant Credit Suisse and rapid collapse of three regional banks in the U.S. has put deposit insurance companies in the limelight. The Federal Deposit Insurance Company of U.S. and esisuisse in Switzerland have a fund balance sufficient enough to insure 1.27% and 1.6% respectively of the total insured deposits.

Meanwhile, Deposit Insurance and Credit Guarantee Corporation (DICGC) in India holds funds to insure 1.8% of Indian deposits (below ₹5 lakh). The Reserve Ratio of insured deposits in India at 1.8% is relatively higher than the economies such as the U.S. (1.27%) and Switzerland (1.6%). To instil confidence in the depositor community, a healthy balance at deposit insurance companies is a must and each nation subscribes to the policy for a stable financial system.

How strong is FDIC

As per economic data provider CEIC, total deposits in the United States stood at $17.6 trillion at the end of February 2023 in which around $10 trillion is protected that merits insurance. Though the latest data for FDIC is not available, at the end of December 2022, the balance at FDIC's deposit insurance fund stood at $128.2 billion.

Before failure, Silicon Valley Bank (SVB) was the 16th largest bank of the U.S. that held $212 billion of assets (loan and investment) against $200 billion of liabilities (deposits) and equity cushion was $12 billion. Though, the total deposit of SVB was higher than the balance fund of FDIC but the insured deposit (account with less than $250,000) at SVB was much lower that helped in instilling confidence among panicked depositors.

The Federal Deposit Insurance Corporation (FDIC) was created in 1933 during the Great Depression as part of the New Deal legislation passed by President Franklin D. Roosevelt's administration. The FDIC insures deposits up to $250,000 per depositor, per insured bank, for each account ownership category.

The FDIC is an independent agency of the federal government that provides deposit insurance to protect depositors in case their bank fails. The purpose of the FDIC was to restore public confidence in the banking system, which had been severely shaken by a wave of bank failures that had wiped out the savings of millions of Americans.

Deposit Insurance in Switzerland

In Switzerland, the deposit Insurance scheme is administered by esisuisse, a private institution that is recognised by Swiss Financial Market Supervisory Authority (FINMA), the Swiss government body responsible for financial regulation.

As per the latest diktat of FINMA, esisuisse needs to maintain a fund balance of CHF 8 billion. The amount corresponds to the value specified in the law of 1.6% of all protected deposits in Switzerland, states the esisuisse website.

As per CEIC, Switzerland's total deposits was reported at CHF 2,084 billion in December 2022. Though, the latest figures are not available, at the end of December 2020, the Swiss banks and securities firms reported approximately CHF 489 billion in protected deposits, states the esisuisse website. As per CEIC in the same period total deposit in the Swiss Banking system was around CHF 1.9 trillion.

Deposit Insurance in China

Concept of Deposit Insurance is relatively a new concept in China. The People's Bank of China set up a deposit insurance fund management company on May 24, 2015 with the registration capital at 10 billion yuan ($1.4 billion). The payout covers a deposit of no more than 500,000 yuan for each depositor in a bank.

As per China Daily news report, China's seven-year-old deposit insurance fund had a balance of $15.14 billion at the end of 2021. More than 4,000 lenders have bought deposit insurance from the fund and paid 46.7 billion yuan ($6.4 billion) of premiums in 2021, according to a statement released by the People's Bank of China. Lenders pay annual premiums at an average rate of 5 yuan for each 10,000 yuan of deposits.

As per CEIC, the total banking deposits in China was $38,687 billion at the end of February 2023.

Deposit Insurance in India

Deposit Insurance and Credit Guarantee Corporation (DICGC), a division of RBI responsible for insuring term deposits under ₹5 lakh, holds ₹1,46,842 crore under the Deposit Insurance Fund as per the corporation's 2021-22 annual report.

As per the Reserve Bank of India, at the end of March 2022, India boasts a term deposit of ₹165 lakh crore out of which ₹81 lakh crore were lying in the accounts with less than ₹5 lakh deposit. Under current laws, any amount less than ₹5 lakh merits deposit insurance. Thus, ₹1.46 lakh crore under DICGC's kitty is just 1.8% of the ₹81 lakh crore term deposit that deserves deposit insurance. Moreover, out of 262 crore bank accounts in India, 98% of accounts merit deposit insurance as they hold less than ₹5 lakh.