How To Offer Senior Citizens Higher FD Protection At A Minuscule Price

A proposal to give senior citizens higher protection on their fixed deposits is now winding its way up from bankers to the Reserve Bank of India and the finance ministry.

It’s a good idea, but it needs to be carefully thought through if it is not to bring in its own distortions. In particular, this increased cover should not be implemented without some, if not all, depositors bearing some portion of the insurance cost.

Currently, the Deposit Insurance and Credit Guarantee Corporation guarantees deposits up to Rs 5 lakh per depositor per bank. Banks pay an insurance premium for this coverage depending on their own financial health.

Banks and non-bank finance companies typically offer 0.25 per cent to 0.5 per cent higher interest rates on fixed deposits held by senior citizens. The standard rate is usually 0.25 per cent, but for specific tenures preferred by banks, this can rise to 0.5 per cent.

What bankers are proposing is a higher cover for senior citizens, but the fact is there is no free lunch. Higher cover means higher insurance costs, and banks either have to pay this from their own pockets or by collecting it from some other source. This means the cost of risk cover is ultimately passed on to customers, either depositors themselves in the form of charges, or borrowers, because banks have to remain profitable to be viable.

Also, for banks to differentiate any more between senior citizens and non-senior citizens would effectively amount to discrimination between different categories of depositors. It will inevitably lead to the use of proxies by those not eligible for higher cover to earn more. It will also make some banks fudge the types of accounts they are holding.

The best way to square this circle is actually staring us in the face. 

First, since senior citizens already earn higher interest on their deposits, it would make sense for banks to, say, deduct 0.05 to 0.1 per cent of that additional interest to cover the higher insurance premium. This may marginally reduce the effective rate for depositors, but they would still earn more than non-senior savers while gaining greater safety. The costs of covering risks and benefits must be better balanced.

Second, for larger deposits, say Rs 50 lakh or more, depositors could choose between higher interest rates or the same rates as non-senior citizens in exchange for greater insurance cover.

Third, there is no reason why large corporate deposits should also not be offered a lower rate for higher risk cover.

Senior citizens do need a degree of reassurance in their lifetime savings, but the case for higher cover must be related to the true costs of insurance. With the economic situation likely to become more unstable in a dangerous world, risks cannot be divorced from economic reality.  

There is no case for separating the cost of insurance from returns for both senior and non-senior citizens once deposits exceed the minimum cover of Rs 5 lakh.