Insuring deposits, ensuring stability: A critical evaluation of six decades of deposit insurance in the Indian banking sector

Abstract

The deposit insurance system in India is one of the oldest in the world. Though deposit insurance is a well-researched area across the globe, it is relatively unexplored in India. This paper aims to critically evaluate some of the core aspects of the Indian deposit insurer, explicate the strengths and weaknesses of the system, highlight the risks that accrue to the system due to its features and the lessons learned from its 60 years of experience. The study suggests that the Indian deposit insurance system is marred by certain issues, such as irregular revisions of coverage limits, cross-subsidisation, delays in the recovery of settled claims, the restricted role of the insurer and the non-availability of a benchmark for the insurance fund. It further provides policy recommendations for practitioners to overcome these shortcomings and enhance the robustness of the deposit insurer by allowing better risk management under the scheme.