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Role of Deposit Insurance in Promoting

Economic Inclusion

Economic Inclusion

It refers to the process of overcoming barriers that prevent people from participating in the economic growth of the society to which they belong.

covers a whole range of areas encompassing health, income, employment, education, community, environment and equity.

The ‘trickle down’ effect of economic growth no doubt works, but it takes too long

Hence a need to focus on inclusive growth.

“Inclusive Growth” is a little more than just the benefits of growth being distributed equitably and evenly

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Inclusive growth

It is the participation of all sections and regions of society in the growth story and their reaping the benefits of growth.

It helps prosperity of the underprivileged – increases demand for the goods and services produced by the expanding corporate sector - much faster growth of the economy.

'If we stop thinking of the poor as victims or as a burden, and start recognising them as resilient and creative entrepreneurs and value conscious consumers, a whole world of opportunity will open up.‘

- Prof. C. K. Prahalad

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Linkages between Economic Inclusion and Financial Inclusion

Financial Inclusion can be defined as the process of ensuring timely access to financial services, especially adequate credit by vulnerable groups such as weaker sections and low income groups at an affordable cost

Economic inclusion is a broader concept – addressed through various fiscal measures – Financial Inclusion one of the ways to support Economic Inclusion

Theoretical and empirical research highlight the role of financial development in facilitating economic development

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Economic Inclusion, Financial Stability and Deposit Insurance Financial Inclusion promotes financial stability by

facilitating efficient and equitable intermediation between savings and investments

Excluded households often tend to access informal financial agents/entities at higher cost and greater risk – the need for protected savings is not often recognised

With greater FI, greater relevance of deposit insurance – people with smaller means need greater assurance for protection of their savings

Thus, economic inclusion, financial stability and deposit insurance are mutually supportive

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Role of Deposit Insurance (DI) in Financial Inclusion (FI) – the

Indian Experience

In India, the DICGC insures deposits up to INR 100,000 (2.4 times per capita GDP) per depositor.

As on March 31, 2008, 92.6 per cent of the number of deposit accounts and 60.5 per cent of the assessable deposits was covered by DICGC insurance.

DICGC cover promotes confidence in the banking system and facilitates financial inclusion

The challenge is how to extend the benefits of deposit insurance to those outside its purview

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Role of DI in FI – the Indian Experience (2)

In India, Micro Finance has played an important role in promoting Financial Inclusion

Self Help Group (SHG) – Bank linkage program – 2.9 million SHG linked to banks serving 41 million people- Low transaction cost, good recovery – deposit insurance protection to accounts maintained by SHGs

BC/BF model – Banks allowed to employ agents for branchless banking – has enabled greater penetration and provision of doorstep banking services and extended protected (insured) savings to those hitherto excluded –ICT solutions enable bank oversight to minimize agency risk

Urban Cooperative Banks (UCBs) are community banks catering to those that tend to be excluded by com. banks - 1,170 UCBs with 50 million deposit accounts for which DI cover available – this sector had many weak elements - because of DI cover, it has been possible to close down nearly 40 banks in last two years 8

Role of DI in FI – the Indian Experience(3)

Role of Primary Agricultural Co-operative Credit Society (PACs), numbering 97,000, in financial inclusion – deposits raised by them from members not insured – need for the same – joint study by NABARD and DICGC

NBFCs - there are 337 NBFCs which hold deposits aggregating INR 244 billion – no deposit insurance available to such deposits – however from point of view of financial stability increasingly clear that these need to be regulated and supervised as closely as banks

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Role of DI in FI – the Indian Experience(4)

Many micro finance companies in India registered as NBFCs. Deposits mobilized by them not covered by DI - these companies together with “not for profit” companies / trusts / societies as a group called MFIs - covers 14 million borrowers. Bill under consideration to allow MFIs in the nature of trusts, societies and cooperatives to accept thrifts - raises issues of depositor protection

Need to extend deposit insurance to the thrift mobilised through non-bank entities is compelling, but imply huge challenges involving their effective supervision and regulation and the availability of supervisory resource for the purpose .

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Role of DI in FI – the Indian Experience(5)

Importance of timely settlement of claims for promoting confidence of depositors in the banking sector

Though problems do crop up due to dual control over co-operative banks and a host of litigations, forums for resolution of such problems have been set up (MOU with State Governments, Co-ordination Committee of RBI & DICGC etc)

Efforts are on to ensure payment to depositors in a few days after liquidation of any bank through a system of on-line availability of depositors’ data on an on going basis

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Role of DI in FI – the Indian Experience(6)

IADI’s Core Principles (No. 16) emphasize the need for a trigger mechanism for Prompt Corrective Action (PCA), which is essential for preventing bank failures and promoting depositors’ confidence

In India the supervision and regulation of banks is the responsibility of the Central Bank (RBI)

Enormous duplication of supervisory cost if DICGC is also engaged in this exercise. However, DICGC collaborates with the regulators to supplement their efforts towards prompt corrective action.

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Role of DI in FI – the Indian Experience(7)

Deposit insurance can promote public confidence in banking system and thereby support financial inclusion only if the public is informed about the benefits and limitations of the deposit insurance system

DICGC does it through booklets, posters, FAQs etc., distributed through huge network of bank branches

In addition, DICGC website (www.dicgci.org.in) hosts detailed information on deposit insurance

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Financial Inclusion and Financial Stability – A Clarification

A view has been expressed in certain quarters that lending to sub prime borrowers, which could be considered as financial inclusion, has been a threat to financial stability

There is a big difference between lending to the poor and excessive leveraging through structured products - it is the latter that creates bubbles and busts

The Indian experience with SHG bank credit linkage as also MFIs shows that the recovery rates are better than in direct lending.

Let us not forget the comments of noble laureate Yunus that the poor are bankable; though the importance of prudence in such lending and borrowing cannot be ignored 14

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Thank You