DEPOSIT INSURANCE COVERAGE LIMIT: HOW MUCH IS ENOUGH? EVIDENCE FROM INDIA
Keywords:
Coverage Limit, Deposit Insurance, Indian Banking.
Abstract
Deposit insurance is one of the safety nets employed by nations to ensure banking stability and depositor protection. Determining the appropriate coverage limit for depositors under a system of explicit deposit insurance is one of the most important policy decisions. This study examines the adequacy of deposit insurance coverage limit, through a case of India, to determine the appropriate level of coverage. The study also investigates the suitability of the recent five-fold increase in the coverage limit of India. Time series data from 1993-94 to 2017-18 has been employed for the regression analysis. India’s data has been compared with several countries with similar deposit insurance characteristics, using a t-test of sample means, over the period 2003 to 2017. The results show that the real coverage limit as well as the coverage ratio in India has been declining over the sample period. Moreover, India’s position has tumbled vis-à-vis its peers in terms of coverage ratio. The findings suggest that the increase in India’s coverage limit, after almost 27 years, is a much-needed move. The increase is enough to bring back India’s coverage limit to comparable levels; however, this one-time increase is not sufficient in isolation of other policy variables.
References
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Boyle, G., Stover, R., Tiwana, A., & Zhylyevskyy, O. (2015). The impact of deposit insurance on depositor behavior during a crisis: A conjoint analysis approach. Journal of Financial Intermediation, 24(4), 590-601. https://doi.org/10.1016/j.jfi.2015.02.001
Cecchetti, S. G. (2008). Deposit Insurance. In S. N. Durlauf, & L. Blume (Ed.), The New Palgrave Dictionary of Economics (2nd ed.,pp. 444-446). London, England: Palgrave Macmillan.
DeLong, G., & Saunders, A. (2011). Did the introduction of fixed-rate federal deposit insurance increase long-term bank risk-taking?. Journal of Financial Stability, 7(1), 19-25. https://doi.org/10.1016/j.jfs.2008.09.013
Demirgüç-Kunt, A., & Detragiache, E. (2002). Does deposit insurance increase banking system stability? An empirical investigation. Journal of Monetary Economics, 49(7), 1373-1406. https://doi.org/10.1016/S0304-3932(02)00171-X
Demirgüç-Kunt, A., & Huizinga, H. (2004). Market discipline and deposit insurance. Journal of Monetary Economics, 51(2), 375-399. https://doi.org/10.1016/j.jmoneco.2003.04.001
Demirgüç-Kunt, A., & Kane, E. J. (2002). Deposit insurance around the globe: Where does it work? Journal of Economic Perspectives, 16(2), 175-195. https://doi.org/10.1257/0895330027319
Demirgüç-Kunt, A., Kane, E. J., & Laeven, L. (2014). Deposit insurance database. Policy Research Working Paper No. 6934. The World Bank. https://doi.org/10.1596/1813-9450-6934
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Ioannidou, V. P., & Penas, M. F. (2010). Deposit insurance and bank risk-taking: Evidence from internal loan ratings. Journal of Financial Intermediation, 19(1), 95-115. https://doi.org/10.1016/j.jfi.2009.01.002
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Lee, W. S., & Kwok, C. C. (2000). Domestic and international practice of deposit insurance: A survey. Journal of Multinational Financial Management, 10(1), 29-62. https://doi.org/10.1016/S1042-444X(99)00018-3
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Oyerinde, A. S. (2017). Bank Performance versus Recession Indicators: A Linear Cointegration Approach. Indian Journal of Finance and Banking, 1(1), 8-15. https://doi.org/10.46281/ijfb.v1i1.81
Reserve Bank of India. (1998). Narasimham committee report on the banking sector reforms. Retrieved from https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/24157.pdf
Reserve Bank of India. (1999). Report of the working group on reforms in deposit insurance in India. Retrieved from https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?FromDate=11/04/99&SECID=12&SUBSECID=2
Reserve Bank of India. (2011). Report of the committee on customer service in banks. Retrieved from https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=645
Reserve Bank of India. (2015). Report of the committee on differential premium system for banks in India. Retrieved from https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=825
Reserve Bank of India. (2018). Handbook of statistics on the Indian economy. Retrieved from https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy
Rezina, S., Chowdhury, R. S., & Jahan, N. (2020). Non-Performing Loan in Bangladesh: A Comparative Study on the Islamic Banks and Conventional Banks. Indian Journal of Finance and Banking, 4(1), 76-83. https://doi.org/10.46281/ijfb.v4i1.539
Shiers, A. F. (1994). Deposit insurance and banking system risk: Some empirical evidence. The Quarterly Review of Economics and Finance, 4, 347-361. https://doi.org/10.1016/1062-9769(94)90019-1
Shy, O., Stenbacka, R., & Yankov, V. (2016). Limited deposit insurance coverage and bank competition. Journal of Banking & Finance, 71, 95-108. https://doi.org/10.1016/j.jbankfin.2016.05.002
Singh, R., Roy, S., & Pandiya, B. (2020). Antecedents of Financial Inclusion: Evidence from Tripura, India. Indian Journal of Finance and Banking, 4(2), 79-92. https://doi.org/10.46281/ijfb.v4i2.745
Sitharaman, N. (2020). Budget Speech. Retrieved from https://www.indiabudget.gov.in/doc/Budget_Speech.pdf
Wagster, J. D. (2007). Wealth and risk effects of adopting deposit insurance in Canada: Evidence of risk shifting by banks and trust companies. Journal of Money, Credit and Banking, 39(7), 1651-1681. https://doi.org/10.1111/j.1538-4616.2007.00082.x
World Bank. (2019). Bank Regulation and Supervision Survey. Retrieved from https://datacatalog.worldbank.org/dataset/bank-regulation-and-supervision-survey#tab2
Beck, T. (2002). Deposit insurance as private club: Is Germany a model?.The Quarterly Review of Economics and Finance, 42(4), 701-719. https://doi.org/10.1016/S1062-9769(02)00122-9
Bezawada, B. (2020). Corporate Governance Practices and Bank Performance: Evidence from Indian Banks. Indian Journal of Finance and Banking, 4(1), 33-41. https://doi.org/10.46281/ijfb.v4i1.502
Boyle, G., Stover, R., Tiwana, A., & Zhylyevskyy, O. (2015). The impact of deposit insurance on depositor behavior during a crisis: A conjoint analysis approach. Journal of Financial Intermediation, 24(4), 590-601. https://doi.org/10.1016/j.jfi.2015.02.001
Cecchetti, S. G. (2008). Deposit Insurance. In S. N. Durlauf, & L. Blume (Ed.), The New Palgrave Dictionary of Economics (2nd ed.,pp. 444-446). London, England: Palgrave Macmillan.
DeLong, G., & Saunders, A. (2011). Did the introduction of fixed-rate federal deposit insurance increase long-term bank risk-taking?. Journal of Financial Stability, 7(1), 19-25. https://doi.org/10.1016/j.jfs.2008.09.013
Demirgüç-Kunt, A., & Detragiache, E. (2002). Does deposit insurance increase banking system stability? An empirical investigation. Journal of Monetary Economics, 49(7), 1373-1406. https://doi.org/10.1016/S0304-3932(02)00171-X
Demirgüç-Kunt, A., & Huizinga, H. (2004). Market discipline and deposit insurance. Journal of Monetary Economics, 51(2), 375-399. https://doi.org/10.1016/j.jmoneco.2003.04.001
Demirgüç-Kunt, A., & Kane, E. J. (2002). Deposit insurance around the globe: Where does it work? Journal of Economic Perspectives, 16(2), 175-195. https://doi.org/10.1257/0895330027319
Demirgüç-Kunt, A., Kane, E. J., & Laeven, L. (2014). Deposit insurance database. Policy Research Working Paper No. 6934. The World Bank. https://doi.org/10.1596/1813-9450-6934
Deposit Insurance and Credit Guarantee Act 1961. (2006, September). Retrieved from https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/dicgc_act.pdf
Deposit Insurance and Credit Guarantee Corporation. (Several issues). Annual report. Retrieved from https://www.dicgc.org.in/PUB_AnnualReports.html
Garcia, G. G. (1999). Deposit insurance: A survey of actual and best practices. IMF Working Paper No. 99/54. International Monetary Fund. Retrieved from https://www.imf.org/en/Publications/WP/Issues/2016/12/30/Deposit-Insurance-A-Survey-of-Actual-and-Best-Practices-2982
Gololo, I. A. (2017). An evaluation of the role of commercial banks in financing small and medium scale enterprises (SMEs): Evidence from Nigeria. Indian Journal of Finance and Banking, 1(1), 16-32. https://doi.org/10.46281/ijfb.v1i1.82
Hooks, L. M., & Robinson, K. J. (2002). Deposit insurance and moral hazard: Evidence from Texas banking in the 1920s. Journal of Economic History, 62(3), 833-853.https://doi.org/10.1017/s0022050702001109
International Association of Deposit Insurers. (2013). Enhanced guidance for effective deposit insurance systems: Deposit insurance coverage. Guidance Paper. Retrieved from https://www.iadi.org/en/assets/File/Papers/Approved%20Guidance%20Papers/IADI_Coverage_Enhanced_Guidance_Paper.pdf
International Association of Deposit Insurers. (2018). IADI Annual Survey. Retrieved from https://www.iadi.org/
Ioannidou, V. P., & Penas, M. F. (2010). Deposit insurance and bank risk-taking: Evidence from internal loan ratings. Journal of Financial Intermediation, 19(1), 95-115. https://doi.org/10.1016/j.jfi.2009.01.002
Kim, I., Kim, I., & Han, Y. (2015). Deposit insurance, banks’ moral hazard, and regulation: Evidence from the ASEAN countries and Korea. Emerging Markets Finance and Trade, 50(6), 56-71. https://doi.org/10.1080/1540496X.2014.1013875
Lee, W. S., & Kwok, C. C. (2000). Domestic and international practice of deposit insurance: A survey. Journal of Multinational Financial Management, 10(1), 29-62. https://doi.org/10.1016/S1042-444X(99)00018-3
Ngalawa, H., Tchana, F. T., & Veigi, N. (2016). Banking instability and deposit insurance: The role of moral hazard. Journal of Applied Economics, 19(2), 323-350. https://doi.org/10.1016/S1514-0326(16)30013-7
Nwangolo, A., & Ogechi, B. (2018). Financial Deepening and Deposit Mobilization of Commercial Banks in Nigeria: A Time Variant Model. Indian Journal of Finance and Banking, 2(2), 1-14. https://doi.org/10.46281/ijfb.v2i2.94
Oyerinde, A. S. (2017). Bank Performance versus Recession Indicators: A Linear Cointegration Approach. Indian Journal of Finance and Banking, 1(1), 8-15. https://doi.org/10.46281/ijfb.v1i1.81
Reserve Bank of India. (1998). Narasimham committee report on the banking sector reforms. Retrieved from https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/24157.pdf
Reserve Bank of India. (1999). Report of the working group on reforms in deposit insurance in India. Retrieved from https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?FromDate=11/04/99&SECID=12&SUBSECID=2
Reserve Bank of India. (2011). Report of the committee on customer service in banks. Retrieved from https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=645
Reserve Bank of India. (2015). Report of the committee on differential premium system for banks in India. Retrieved from https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=825
Reserve Bank of India. (2018). Handbook of statistics on the Indian economy. Retrieved from https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy
Rezina, S., Chowdhury, R. S., & Jahan, N. (2020). Non-Performing Loan in Bangladesh: A Comparative Study on the Islamic Banks and Conventional Banks. Indian Journal of Finance and Banking, 4(1), 76-83. https://doi.org/10.46281/ijfb.v4i1.539
Shiers, A. F. (1994). Deposit insurance and banking system risk: Some empirical evidence. The Quarterly Review of Economics and Finance, 4, 347-361. https://doi.org/10.1016/1062-9769(94)90019-1
Shy, O., Stenbacka, R., & Yankov, V. (2016). Limited deposit insurance coverage and bank competition. Journal of Banking & Finance, 71, 95-108. https://doi.org/10.1016/j.jbankfin.2016.05.002
Singh, R., Roy, S., & Pandiya, B. (2020). Antecedents of Financial Inclusion: Evidence from Tripura, India. Indian Journal of Finance and Banking, 4(2), 79-92. https://doi.org/10.46281/ijfb.v4i2.745
Sitharaman, N. (2020). Budget Speech. Retrieved from https://www.indiabudget.gov.in/doc/Budget_Speech.pdf
Wagster, J. D. (2007). Wealth and risk effects of adopting deposit insurance in Canada: Evidence of risk shifting by banks and trust companies. Journal of Money, Credit and Banking, 39(7), 1651-1681. https://doi.org/10.1111/j.1538-4616.2007.00082.x
World Bank. (2019). Bank Regulation and Supervision Survey. Retrieved from https://datacatalog.worldbank.org/dataset/bank-regulation-and-supervision-survey#tab2
Published
2020-12-15
How to Cite
Sardana, V., & Shukla, A. (2020). DEPOSIT INSURANCE COVERAGE LIMIT: HOW MUCH IS ENOUGH? EVIDENCE FROM INDIA. Indian Journal of Finance and Banking, 4(4), 66-83. https://doi.org/10.46281/ijfb.v4i4.912
Section
Research Paper/Theoretical Paper/Review Paper/Short Communication Paper
Copyright (c) 2020 Varda Sardana, Abha Shukla
This work is licensed under a Creative Commons Attribution 4.0 International License.
