ICRA expects an increase in deposit insurance limit as well as premium in the wake of the recent failure of a cooperative bank. This, in turn, will impact banks’ return on assets (RoA) and return on equity (RoE).
This assessment comes in the backdrop of frauds hitting the urban co-operative banking segment in the last few years.
In 2019, the Punjab and Maharashtra Cooperative Bank was hit by a massive ₹6,500 crore scam. More recently, the New India Cooperative Bank was impacted by a ₹125 crore fraud.
While the proposed increase in deposit insurance limit (it was last raised five times to ₹5 lakh per depositor per institution in February 2020) is not known, the rating agency expects the insurance premium to be raised to 0.15 paise (from 0.12 paise) per ₹100 of deposit, with the prior approval of the Reserve Bank of India (RBI), to help the DICGC (Deposit Insurance and Credit Guarantee Corporation) shore-up its Deposit Insurance Fund (DIF).
Under various scenarios, whereby the insured deposits/IDR ratio (insured deposits to assessable deposits), increases to 47.0-66.5 per cent, ICRA estimates the banks’ profit after tax (PAT) to be adversely impacted by ₹1,800-12,000 crore annually, translating into a moderation of return on assets (RoA) by 1-4 basis points (bps) and return on equity (RoE) by 7-40 bps.
Additionally, if the insurance premium is increased, the cumulative impact on RoA and RoE will be 3-7 bps and 27-68 bps respectively.
ICRA noted that the increase in insured deposit base would also lead to a reduction in ratio of DIF to insured deposits base called reserve ratio (RR).
Under various scenarios, the agency estimates the RR to fall to 1.5-2.1 per cent from current level of 2.1per cent. With the increase in premium to ₹0.15 from ₹0.12 per ₹100 deposit, the DIF would get a marginal benefit and the moderation in RR would be 1.6 per cent-2.1 per cent.
The agency opined that the rise in insurance limit may increase the deposits qualifying for the stable deposit base (and hence attracting lower outflow rates).
This may result in the overall decline in deposit outflow rates for calculation of liquidity coverage ratio (LCR), thereby reducing the requirements of excess High Quality Liquid Assets (HQLA, which are government securities) held by banks.
As on March 31, 2024, 97.8 per cent of the total number of eligible/assessable accounts were fully covered. The remaining 2.2 per cent of the accounts were partially covered up to the coverage limit of ₹5 lakh.
The coverage ratio in terms of value of deposits, termed as insured deposit ratio was 43.1 per cent as on March 31, 2024 (44.4 per cent as on March 31, 2023).