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One of the key amendments in the draft of the US bailout Bill now passed by the US Senate and House of Representatives is the move to hike US federal deposit insurance from the current $100,000 to $250,000. This increase in the federal insurance limit is expected to calm depositors in the midst of a flurry of collapsing financial institutions. It is also expected to bring greater stability to the financial system, particularly banks—if deposits worth $250,000 are guaranteed the chances of a run on a bank are much reduced. The UK is also seriously considering raising its deposit insurance from 35,000 pounds to 50,000 pounds. Remember that in the UK, there was a run on Northern Rock by depositors last year. Deposit insurance is a necessity in an era of fractional-reserve banking—even in the absence of imprudence banks will never actually hold all their deposits in cash at any one time making them vulnerable to a run at any point.
India, despite its archaic financial system, has a surprisingly commendable deposit insurance scheme. India was, in fact, one of the earliest implementers of deposit insurance way back in the 1960s. Currently, an amount of Rs 1 lakh is guaranteed to depositors in the event of a failure or closure of a bank. This is small when compared with the US—Rs 1 lakh is worth just over $7,000 in the US in PPP terms. India is, of course, a country with much lower average incomes; so the size of deposits is much less than in the US. The total number of bank accounts (in scheduled commercial banks) in India is around 5.19 crore. The average size of a deposit is around Rs 50,000, well below the deposit insurance level. If one extracts the figures for metropolitan areas, then the average amount of a deposit is around Rs 90,000. Again, this is under the deposit insurance amount. It would seem then that there is little to worry about in terms of saving the aam aadmi’s savings in the event of a run on a commercial bank in India. But two things are still necessary: first, the government must educate the public at large about the existence of a deposit insurance scheme. Second, there is a need to begin thinking about raising the limit further, as incomes grow. Even now, many of the 98,31,000 metropolitan accounts would have deposits of more than Rs 1 lakh. No need to wait for a crisis to up the limit.
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