Risk-based premium on deposit insurance to test banks' fund-raising ability

From April 21, banks shift to risk-based deposit insurance premiums, with better-rated lenders paying less and a likely hike in the ₹5 lakh insurance cap

Sixty-three years after deposit insurance came into being, a shift to a framework where banks will pay a premium linked to their risk profile is to kick in from April 21. It also sets the stage for an upward revision in the current deposit insurance limit of ₹5 lakh per depositor per bank. 

Since the Deposit Insurance and Credit Guarantee Corporation of India (DICGC) — a subsidiary of the Reserve Bank of India (RBI) — was set up in 1962, the premium on deposit insurance has been flat at 12 paise per ₹100 of assessable deposits. The RBI’s Central Board on December 19 last year approved the switch to a risk-based premium (RBP) format, seeking to incentivise sound risk management in banks and promote financial stability. From here on, there will be a two-tiered risk model.  Tier-I is applicable to scheduled commercial banks other than regional rural banks (RRBs). Tier-II is for RRBs and cooperative banks. It is not that weaker banks will pay more than the current uniform premium of 12 paise for every ₹100 of deposits. But this will be the cap, and the better-rated banks will pay lower. 

The plot changes 

What about the financial load on banks arising from the new system? Anil Gupta, senior vice-president and co-group head (financial sector ratings) at Icra, feels the expansion in the insured deposit base “would increase premium payouts and lower the banking system profitability by an estimated ₹2,000-12,000 crore annually.” And while there will be a moderation in the return on assets by 1-4 basis points, stronger banks receiving discounted premium rates would be able to offset the impact.

The RBP architecture — radical as it may appear — is not a new concept. It was flagged by the Jagdish Capoor Working Group on Reforms in Deposit Insurance, 1999; the Committee on Credit Risk Model, 2006 set up by the DICGC; and the Jasbir Singh Committee on Differential Premium System for Banks, 2015. Incidentally, the Singh committee was set up after the matter of RBP was discussed at the RBI’s Central Board meeting on October 16, 2014. It was felt that the DICGC could “explore the possibility of putting in place a differential premium within the cooperative sector linking it to the governance and risk profile of co-operative banks”. 

It raises another issue: Will there be a flight of deposits to banks with a better risk profile, restricting their ability to grow? Do remember the larger setting: The move to RBP comes at a time when bank deposit mobilisation has been impacted by the attractiveness of other investment avenues. 

As Ravi Bhadani, a legal expert on banking and financial services, views it, the RBP expressly treats bank-specific risk ratings as “confidential supervisory information and prohibits their public disclosure”. For listed banks, disclosure obligations are governed by the Securities and Exchange Board of India’s (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Sebi LODR). In particular, Regulation 30 (13) clarifies that disclosure is not required where it is prohibited by law or by a regulatory authority. Accordingly, routine changes in deposit insurance premium or effective rates arising from the framework do not constitute material events. “However, any independent material regulatory or financial development, such as moratorium, restructuring, or a material impact on profitability, would require disclosure under the Sebi LODR,” says Bhadani. Separately, any action by a regulatory authority, such as suspension, imposition of penalties, warnings or similar measures, is required to be disclosed in terms of paragraph A (20) of Schedule III of the Sebi LODR. 

Premium question 

Are the sums collected as deposit premium an overkill? Premiums received by DICGC in FY25 grew by 12.1 per cent to ₹26,769 crore; the Deposit Insurance Fund grew by 15.2 per cent to ₹228,933 crore. But the claims settled during this period were ₹476 crore; and since inception, at ₹16,941 crore. “Since 1962, no commercial bank has been closed. You only had a moratorium and merger with another bank. So, collecting a huge premium is not necessary,” believes C H Venkatachalam, general secretary of All India Bank Employees Association. This is because the amended Section 45 of the Banking Regulation Act (1947) — put through in 1960 — gave the government and the RBI powers to amalgamate banks to avert closures. Post this amendment, no commercial bank has been shut down. 

It leads to another aspect, unrelated as it may seem. “We now have borrowers who are rated, and soon banks’ deposit premium is to be linked to their risk,” says Mridul Saggar, former RBI executive director and a past member of the Monetary Policy Committee­­. “Directionally, it may be worth revisiting if state government borrowings are also to be aligned to their ratings, something on which the 16th Finance Commission report seems to have omitted discussing pros and cons.”

An upward revision in the deposit insurance limit to ₹15 lakh from ₹5 lakh per depositor per bank is certain. In early 2025, M Nagaraju, secretary, Department of Financial Services, had said a hike in the sum covered is under consideration that was speculated to move up to ₹15 lakh. The RBP system also informs that Mint Road is taking a longer-term position: It is to be reviewed at least once in three years.