Replacement of bank deposits by CBDC an area of key interest for deposit insurers: RBI

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Deposit insurers or lenders that provide insurance to depositor funds against bank failures should take an interest in the degree of replacement of bank deposits by central bank digital currencies (CBDCs), according to the Reserve Bank of India (RBI).

“For deposit insurers, factors of key interest would be the degree of replacement of bank deposits by CBDC, the division of labour between central and commercial banks and the degree of privacy attached to CBDC usage,” Michael Debabrata Patra, deputy governor of Reserve Bank of India, said in his speech at an event.

“They also need to contend with the possibility that during [a crisis] triggering depositor panic, CBDCs could be perceived as a safe haven, thus rendering bank deposits, particularly uninsured deposits, more prone to withdrawal and hence the risk of bank runs,” Patra pointed out.

“Given the inherent links between such systems and the objectives and operations of deposit insurers, it is expected that the topic of CBDC will continue to grow in relevance for deposit insurers and the IADI [International Association of Deposit Insurers], warranting the need to keep abreast of developments and policy deliberations as they emerge,” Patra added.

Patra was speaking at the International Association of Deposit Insurers (IADI) Asia Pacific Regional Committee (APRC) International Conference, hosted by Deposit Insurance and Credit Guarantee Corporation (DICGC). The DICGC ensures all types of bank deposits, such as savings, fixed, current, and recurring.

According to Patra, the DICGC’s coverage includes 1997 banks comprising 140 commercial banks and 1,857 cooperative banks —the largest number of deposit-taking institutions covered by deposit insurance worldwide, second only to the USA. Currently, the deposit insurance coverage limit (Rs 500,000 or approximately $6,000) fully protects 97.8% of deposit accounts and 43.1% of deposit value.

As of March 31, 2024, Patra said interim payments were made to 376,661 depositors amounting to Rs 5359 crores (about $640 million).

“Two digital innovations in currencies and payment systems merit special attention as both have implications for deposit insurance. The first one is central bank digital currency (CBDC) – legal tender or fiat currency issued by a central bank in a digital form,” Patra said.

The major advantages of CBDCs are the finality of transactions—settlement risks are eliminated as there is no bank intermediation—and real-time and cost-effective globalization of payment systems. India started a pilot for wholesale CBDC (e₹-W) in November 2022 and retail CBDC (e₹-R) in December 2022.

As an increasing number of central banks face the risk of large-scale public use of digital instruments that may not be backed by or denominated in the domestic currency, CBDCs may assist in mitigating this risk by being a central bank liability and a form of digital cash, Patra pointed out. To the public, they would be an alternative to central bank-issued cash and—to a certain extent—to private money, such as bank deposits.

However, “The impact of CBDC on deposits and hence deposit insurance is largely unknown as of today. The operating models and design features of each individual jurisdiction’s CBDC will be a crucial factor in expanding our understanding of the balance of risks,” Patra added.

Watch: Finding ways to use CBDC outside of digital currencies