RBI Proposes Risk-Based Deposit Insurance Premiums: What It Means For Banks And Depositors

The Reserve Bank of India (RBI) decided in its recent monetary policy committee (MPC) meeting to replace the flat premium model for deposit insurance with a ‘risk-based premium’ (RBP) model.

With this, the central bank has proposed a significant change in the way banks pay for deposit insurance. For decades, every bank has been charged the same fixed premium to cover its depositors under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme.

That uniform charge currently stands at 12 paise for every Rs 100 of deposits, regardless of whether a bank is financially strong or weak.

However, in the next financial year, RBI plans to move towards the RBP framework.

What is the new proposal?

In simple terms, this means banks that are well-managed, well-capitalised and less risky will pay a lower insurance premium, while banks with weaker balance sheets or riskier profiles may have to continue paying at the ceiling rate.

This proposal, on the surface, seems like a technical adjustment. However, it could very well shape the way Indian banks approach risk and financial discipline.

Was this change necessary?

The current system for deposit insurance scheme is easy to run but it has one drawback - it does not differentiate between banks on the basis of their financial strength. A healthy private sector bank with a solid balance sheet pays the same premium as a cooperative bank that might be under financial stress.

That equal treatment has long been seen as unfair and, more importantly, it removes any incentive for weaker banks to improve their risk management. Internationally, most deposit insurers already follow a risk-based system, charging higher-risk banks more. The RBI’s move is essentially about bringing India’s practice closer to global standards.

Under the new model, the ceiling of 12 paise per Rs 100 will remain. No bank will pay more than that. But well-rated banks will pay less, which means that good behaviour in terms of capital adequacy, asset quality and governance will directly translate into lower insurance costs.

What remains unchanged for depositors

For depositors, the important point is that the insurance coverage itself is not changing. The limit continues to be Rs 5 lakh per depositor, per bank, covering both the principal and interest. This protection applies across savings accounts, current accounts, fixed deposits and recurring deposits.

A few things are worth remembering about how this coverage works:

• Deposits across all branches of the same bank are added together before the insurance limit is applied.

• Accounts in different banks are insured separately.

• If you have a joint account with another person, that account gets its own separate coverage.

The premiums are always paid by banks, not depositors. For individuals, the protection remains free. So, while banks may pay less or more depending on their financial soundness, customers will not see any change in what they are entitled to.

A wider push for stronger banks

This change is not happening in isolation. In the October 1 MPC announcements, RBI governor Sanjay Malhotra laid down some key measures to strengthen the banking sector, such as:

• Bringing in the Expected Credit Loss (ECL) provisioning framework

• Moving towards stricter Basel III norms from 2027

• Setting higher governance standards

The introduction of the RBP system, like all the above measures, is another step to nudge the banking sector towards prudence.

The central bank is trying to reward the stronger banks with lower premiums, while others will be encouraged to clean up their books, maintain adequate capital buffers and move towards better risk practices.

For depositors, that should eventually mean more confidence in the stability of the banks they deal with.

Looking ahead

The fine print of the new framework is still awaited. The RBI and DICGC will soon be notified of the exact parameters that will determine how premiums are calculated. Factors such as a bank’s capital adequacy, asset quality, and governance practices are likely to carry weight.

For now, depositors don’t need to do anything since their insurance protection is unchanged.

The bigger story lies in how banks respond once the system kicks in. If it works as intended, the cost of being risky will rise for weaker banks, while stability will come with a financial reward.

In short, while depositors continue to enjoy the same Rs 5 lakh insurance cover, the behind-the-scenes cost structure for banks is set to become sharper, fairer, and more aligned with global practice.