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PMC scam: Insure all bank deposits; Deepak Parekh right to flag this issue

The Financial Express
HDFC chairman Deepak Parekh, loan waivers, corporate loan write offs, common man savings, Punjab, Maharashtra Cooperative Bank, SBI chief economic advisor, Soumya Kanti Ghosh, deposit insurance, india per capita income

HDFC chairman Deepak Parekh has done well to draw the government's attention to how "brutally unfair" it is that while tens of thousands of crore rupees can be written off via loan waivers or corporate loan write-offs, there was no system in place to protect the common man's savings. While Parekh said this in the context of thousands of depositors whose money is stuck in the Punjab & Maharashtra Cooperative Bank, the larger problem is that bank deposits of just upto `1 lakh are insured-so, if a bank fails, whether a depositor has `20 lakh or `50 lakh of deposits, the government only guarantees her getting `1 lakh back.

As SBI chief economic advisor Soumya Kanti Ghosh points out in the context of the need to raise the amount of deposit-insurance, the amount of insured deposit in India is just 0.9 times the country's per capita income; this number is 4.4 times in the case of the US and 7.4 in the case of Brazil.

Given most politicians in the country are focused on only the poor, they think the amount of insurance is sufficient; after all, over 61% of deposits in banks are of less than `1 lakh. This, however, is short-sighted, apart from being unfair.

There is no reason to believe that just because people earn more, it doesn't really matter if they lose their savings. But even in terms of being pragmatic, it is important to hike this limit since, while 61% of depositors have less than `1 lakh in the bank, they account for just 7.8% of the deposits in banks according to Ghosh's data. So, if banks are to fail, and richer depositors lose their money, the country's financial savings will also be hit in a big way. Ghosh's data show that just 0.2% of bank deposits are of more than `1 crore; you would think it doesn't really matter if these deposits are not insured and the depositors lose their money, but around a third of all deposits in the banks are made by this category of depositors!

Indeed, there is a larger lesson here for politicians in terms of their approach to the well-off. The recent hike in the income tax surcharge on the rich suggests that the government feels it is okay to soak the rich. A look at the direct tax data, however, should make politicians rethink.

Of the `7.2 lakh crore of direct taxes paid in FY17, over a third was paid by 480 firms/individuals who had an income of over `100 crore; in terms of the number of taxpayers, they were just a little under 0.001%! If India's tax, savings and consumption base rests on a fairly small segment of the population, no government interested in sustained growth can afford to ignore the interests of the better off, no matter how politically insignificant they are.