Banks to pay deposit insurance premiums under new system starting April 1

India will shift to risk-based deposit insurance premiums from April 1, replacing the decades-old flat fee system to reward banks with stronger risk management

Feb 6 (Reuters) - India is set to overhaul how banks pay for deposit insurance, by linking premiums to a lender's risk profile ‍instead of a decades-old flat ​fee, under a new RBI framework that aims to incentivise better risk management by rewarding stronger banks with lower premiums.

From April 1, banks will pay deposit insurance premiums under the new system, which will be implemented by the Deposit Insurance and Credit Guarantee Corporation, the RBI said on Friday.

India ​has operated a flat-rate deposit insurance system since 1962, under which banks paid a uniform premium - currently 12 paise per 100 rupees of assessable deposits - regardless of their risk profile.

 

The system was simple to administer but did not differentiate between banks that managed risks better, the country's central bank said.

Under the new framework, banks will be assessed using financial and supervisory indicators such as capital strength, asset quality, earnings and liquidity, as well as the potential loss their failure could impose on the deposit insurance fund, the RBI said.

The central bank introduced two risk assessment models - a Tier 1 model for scheduled commercial banks, excluding regional rural banks, and a Tier ‌2 model for regional rural banks and ​cooperative banks.

Premium adjustments will be capped, with risk-based incentives limited to 33.33% over the card rate, the RBI said.

Banks may also receive a "vintage" incentive of up to 25% for a longer contribution to the deposit insurance ‍fund without major claim payouts, with the effective premium reflecting both incentives applied to the card rate.

Payments banks and local area banks will ‍continue ‌to pay the ​card premium rate due to data limitations, ‍while urban cooperative banks under supervisory or corrective action will be brought under ‍the ‍new framework after ‌exiting such restrictions, the RBI said.

(Reporting by Aleef Jahan in Bengaluru; Editing by Shreya Biswas)