While digital innovations can ease the cross-border supply of financial services, they can also increase the likelihood of deposit insurers being exposed to member banks with a significant share of non-domestic depositors. File
| Photo Credit: Reuters

Reserve Bank of India (RBI) Deputy Governor Michael Patra on Tuesday (August 13, 2024) asked deposit insurers and other financial safety net participants to put in place frameworks to manage the failure of deposit-taking institutions and prevent potential contagion effects.

“With the rapid digitisation of financial transactions, the crisis can propagate quickly requiring emergency liquidity assistance and pre-emptive interventions in troubled institutions,” said Mr. Patra while delivering a keynote address at a conference on ‘Navigating Emerging Challenges for Deposit Insurers and Fortifying Crisis Preparedness’ in Jaipur.

To deal with the emerging challenges, he said, “The Deposit Insurance and Credit Guarantee Corporation (DICGC) is prioritising risk management, including contingency planning and crisis management frameworks.” Mr. Patra said that it is “imperative for deposit insurers and other financial safety net participants to put in place frameworks for crisis preparedness and management that enhance their ability to manage the failure of deposit-taking institutions while mitigating potential contagion effects.”

“Crises tend to propagate quickly and hence must include augmented provisions of emergency liquidity assistance and pre-emptive interventions in troubled institutions.” He also said the digital payments space is undergoing a silent revolution.

In over 70 countries today, domestic payments reach their destination in seconds at near-zero cost to the sender or the recipient with the growing availability of instant payment systems (IPS).

“Deposit insurers are having to re-evaluate operational risks posed to depositors and member banks from the emergence of these 24/7 payment systems,” he said.

While digital innovations can ease the cross-border supply of financial services, they can also increase the likelihood of deposit insurers being exposed to member banks with a significant share of non-domestic depositors and additional challenges in the case of a payout following bank default.

“In fact, the increasing ambit of cross-border banking activities makes cross-jurisdiction cooperation between deposit insurers and other financial safety net participants all the more relevant,” the Deputy Governor said at the conference.

The International Association of Deposit Insurers (IADI) Asia Pacific Regional Committee (APRC) International Conference was hosted by the DICGC.

Mr. Patra further said deposit insurers must remain ready for tokenised deposits by reflecting on how to modify their mandates and coverage, considering that tokenised deposits are essentially claims on issuing banks like other forms of deposits.

“Moreover, the risks posed by tokenised deposits have to be modelled for determining fund size and premium rates,” he said.

“They will also have a bearing on the choice of modalities for resolution and claim processing, with different banks using different technologies as also the possibility that tokenised deposits could be held by depositors who are not KYC compliant and not clients of issuing banks. Consequently, verification of the authenticity and genuineness of claims may prove to be a testing challenge,” he added.

“The global financial landscape is changing rapidly and for deposit insurers and other financial safety net participants, it is a race to stay ahead of the curve amidst these tectonic shifts,” he said.

The DICGC covers 1,997 banks comprising 140 commercial banks and 1,857 cooperative banks ‘ the largest number of deposit-taking institutions covered by deposit insurance in the world, second only to the U.S.

Currently, the deposit insurance coverage limit (₹5 lakh or approximately $6,000), fully protects 97.8% of deposit accounts and 43.1% of deposit value.

As on March 31, 2024, interim payments were made to 376,661 depositors amounting to ₹5,359 crore.