News that many Indian bank customers are panicking and either withdrawing their deposits or spreading them over several banks should serve as a warning signal to the government and the Reserve Bank of India that they need to move quickly. Finance minister P Chidambaran has already gone on record to assure citizens that their bank deposits are safe. The RBI has also strongly confirmed the solvency of a major private sector bank that has been the victim of recent rumour-mongering.
However, this is not enough. When faced with a growing crisis of confidence in the banking system, the government needs to do much more. The US has raised deposit insurance from $100,000 to $250,000. Germany has guaranteed all bank deposits. So has Australia. It is time for the Indian government to either do the same or substantially enhance the insurance to Rs500,000 per depositor at the very least. This will squelch all panic at one stroke. Giving assurances in dribs and drabs will not work. Sometimes it is necessary to squash an insidious fly with a sledgehammer.
