How safe are their investments and deposits in Indian banks and what is the level of protection they can expect?
This question raised by NRIs comes in the wake of India’s central bank suspending operations of a large cooperative bank and clarifying that deposit insurance coverage is limited to INR100,000 ($1,410; £1,095; €1,268) irrespective of the size of deposits.
The Reserve Bank of India recently ordered Mumbai-based Punjab & Maharashtra Co-operative (PMC) Bank to suspend business for six months for mismanagement, appointed an administrator and capped deposit withdrawals at INR40,000.
This created panic among depositors and triggering a run on other cooperative banks.
Though the bank is not under liquidation, the depositors’ predicament has brought to light the risk of depositors’ money and low safety of deposits in Indian banks.
As per the current regulations, bank deposits are protected under the deposit insurance scheme and guarantee provided by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC), a subsidiary of the Reserve Bank of India.
The scheme guarantees the depositor a payment of up to INR100,000 in the event of the bank closure or liquidation, irrespective of the size of the deposit in the bank.
NRIs aver that the current deposit insurance ceiling of INR100,000 is abysmally low at a time when they park a substantial part of their savings in fixed deposits in Indian banks.
In comparison with India’s guarantee cap of INR 100,000 ($1,410) per investor, protection stands at $70,000 in China, $160,000 in Thailand, $63,470 in Brazil, $16,928 in Russia and $9,500 in the Philippines.
TK Prasad, Mumbai-based financial expert, said: “The deposits in Indian banks are insured with DICGC and in case of liquidation of the bank, the corporation is liable to pay each depositor through the liquidator. The amount of this deposit is up to INR100,000 within two months from the date of claim list from the liquidator. India was planning to raise this level, but only to a small extent.
“That too faced resistance from the industry and bank employees’ union. There is no likelihood of this ceiling being raised. NRIs prefer to keep their savings in bank deposits in India for easy liquidity. The recent episode should be an eye opener.
“They are advised to diversify their savings into various instruments and financial institutions,” he added.
NRI deposits decline
Meanwhile, a Reserve Bank of India report said that NRI deposits dropped to $4bn between April and August 2019 against $5.7bn in the corresponding period last year.
Deposits in non-resident (external) rupee account (NRERA), used by NRIs in the Gulf, stood at $2.5bn during the five months compared to $4bn in the corresponding period last year. The total NRI deposits in banks at the end of August 2019 at $130bn account for almost 34% of India’s foreign exchange reserves, estimated at $440bn.
The banking regulator said in its annual report that with the current limit of deposit insurance at INR100,000, the number of fully protected accounts is two billion at the end of March 2019, which constituted 92% of the total number of accounts, as against the international benchmark of 80%.
More than the concerns about deposit guarantee it was the declining deposit rates that caused a 29% drop in NRI deposits in banks in five months up to August 2019. There is also tilt in preference from bank deposits to mutual funds with unattractive deposit rates.
