The Reserve Bank of India (RBI) has taken a significant step towards reforming the country's deposit insurance framework. The central board of the RBI has given its approval to move away from a one-size-fits-all premium system to a model where banks will be charged based on their individual risk profiles.
From Flat Rate to Risk-Based: The Core Shift
This decision marks a fundamental change in how the Deposit Insurance and Credit Guarantee Corporation (DICGC) operates. Since its inception under the DICGC Act of 1961 and operational since 1962, the corporation has charged all banks a uniform premium rate. Currently, this rate stands at 12 paise for every Rs 100 of assessable deposits.
Announcing this key banking reform measure alongside the monetary policy decision in October, RBI Governor Sanjay Malhotra explained the rationale. He noted that while the existing flat-rate system was simple to manage, it failed to distinguish between banks based on their financial health and stability.
How the New Premium Model Will Work
Under the proposed risk-based framework, the current flat premium will be replaced. Banks will now be assessed on key parameters including their capital adequacy, asset quality, and governance standards.
Financially stronger institutions with robust capital buffers, healthier loan books, and sound management practices will benefit by paying significantly lower insurance premiums. Conversely, banks perceived as weaker on these metrics will have to pay a higher premium to the DICGC for the same deposit insurance cover.
Governor Malhotra emphasized that this move will reward well-managed banks, stating, "It is, therefore, proposed to introduce a risk-based premium model which will help better-rated banks to save significantly on the premium paid."
Implications for the Indian Banking Sector
This reform is expected to have wide-ranging consequences. It introduces a direct financial incentive for banks to maintain stronger balance sheets and adhere to superior governance norms. The cost of deposit insurance will now be linked to a bank's risk management effectiveness.
For customers, the change reinforces the safety of the banking system by encouraging greater stability across all institutions. The DICGC framework itself remains a critical safety net, protecting depositors' money up to a specified limit.
The shift to a risk-sensitive pricing mechanism aligns India's deposit insurance practices with more advanced global standards, promoting a more resilient and accountable banking ecosystem.
