The hidden costs of deposit insurance: evidence from India's cross-subsidisation model

Varda Sardana, Shubham Singhania, Amiya Kumar Mohapatra and Deepankar Chakrabarti

International Journal of Sustainable Economy, 2024, vol. 16, issue 3, 361-381

Abstract: This paper highlights the issue of cross-subsidisation prevalent under the explicit system of deposit insurance adopted by countries. Through a case study of India, this paper underlines how the provision of deposit insurance coverage to heterogeneous categories of banks, under the same insurer, can lead to subsidies flowing from the higher efficiency bank groups to the lower efficiency ones. The study compares the costs and benefits of deposit insurance for the two bank groups in India, using regression analysis over 25 years, from 1996-1997 to 2020-2021. The results support the presence of cross-subsidisation between commercial and cooperative bank groups. Bank regulatory modifications, such as the adoption of risk-based premium, determination of premium based on actual insured deposits, and setting up separate deposit insurers for heterogeneous bank groups can be considered for minimising the negative implications of such unwarranted subsidies, thereby ensuring banking stability as well as sustainability.

Keywords: deposit insurance; cross subsidisation; Indian banking; commercial and cooperative banks; bank sustainability; banking regulation. (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijsuse:v:16:y:2024:i:3:p:361-381

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