Reserve Bank to link deposit insurance premiums to bank risk

The central bank on Wednesday proposed a new model of deposit insurance, where safer banks will pay less premiums while weaker ones pay relatively more.

The risk-based model would be a departure from the current practice, where banks pay a uniform 12 paise for every ₹100 of deposits. The shift from the decades-old flat-rate system is designed to incentivize sound financial management, the Reserve Bank of India (RBI) said.

For the regular customer, the core protection for their savings remains unchanged. The deposit insurance cover of ₹5 lakh per depositor, per bank, which includes both principal and interest, is not affected by this new premium policy. The insurance is provided by the Deposit Insurance and Credit Guarantee Corp. (DICGC), a central bank subsidiary.

The current flat rate of 12 paise per ₹100 will serve as a ceiling, meaning well-managed banks will see their costs decrease, while no bank will pay a higher rate than the current one. Detailed guidelines are expected shortly, and the new premium structure will become effective from the next financial year.

The goal is to “incentivize sound risk management by banks and reduce premium to be paid by better rated banks,” RBI governor Sanjay Malhotra said.

The existing system “does not differentiate between banks based on their soundness,” RBI said, meaning a financially robust bank pays the same insurance rate as a riskier one. Under the new risk-based premium framework, this will change. The premium a bank pays will be directly linked to its risk profile.

The insurance limit was raised from ₹1 lakh in 2020 to boost depositor confidence. As of March 2025, 97.6% of all deposit accounts in India were fully protected under this coverage, DICGC data showed.

While the reform aims to strengthen the system, it could also intensify competition.

Vijay Mani, banking and capital markets leader at Deloitte India, said “developing a risk-based premium system is a complex matter, and some differences of opinion with banks are to be expected.”

There may be concerns around the fairness of measurement, but on balance, “this represents an improvement over a flat-rate system, as it helps ensure better alignment of incentives,” Mani added.

According to Anil Gupta, senior vice-president at Icra Ltd, the move might give larger, safer banks a competitive advantage. If these institutions pass on the savings from reduced insurance costs to customers through higher deposit rates, they could attract more business.

Gupta noted this may “pressure smaller and weaker banks, adversely impacting their market share,” as they might be forced to offer higher rates despite their own elevated insurance costs.

This initiative is part of a broader series of reforms by the RBI to enhance banking sector resilience, which also includes the implementation of revised capital norms and tighter governance standards.

Mani of Deloitte noted that while weaker banks may experience some challenges initially, this can serve as a stronger incentive for them to strengthen their overall health.

However, Shruti Jain, chief strategy officer at Arihant Capital Markets, pointed out that one big challenge would be creating a ‘one-size-fits-all’ risk model.”

She emphasized that a model that is fair to large commercial banks and doesn’t crush the small co-operative banks with complex data requirements, is an immense implementation challenge. She cautioned that if the RBI imposes a complex model, it “could place a disproportionate compliance and cost burden on small banks,” potentially leading to inaccurate risk ratings or operational difficulties.

Mukesh Chand, senior counsel at Economic Laws Practice, explained that the RBI’s proposal flips the current system, where every bank pays the same premium regardless of risk. “Smaller banks with higher risk may pay more now, while the cost will go down for stronger banks”, he said.

He explained that the policy does not change the deposits covered, which protects small and medium depositors, covering around 40% of all deposits.

He added that with inflation and bigger average balances, it is a good time to review the ₹5 lakh cap too, link any increase to the new risk-based premium matrix, and make product labelling crystal-clear so depositors can consciously choose DICGC-insured bank deposits (with higher limits). “If feasible, policymakers could even explore an optional top-up cover for depositors,” Chand said.