RBI Approves Risk-Based Deposit Insurance Framework, Aims To Strengthen Bank Safety Nets

The Reserve Bank of India’s (RBI) Central Board has approved a shift towards a risk-based deposit insurance system, under which banks’ contributions to the insurance pool would vary based on their risk profile, as per media reports.

What Will Change 

At present, all banks pay the same insurance premium to the Deposit Insurance and Credit Guarantee Corporation, regardless of their financial position. Under the new system, insurance premiums will be linked to a bank’s risk profile. Banks assessed to be financially weaker will pay more, while stronger banks will pay lower premiums.

The change does not affect depositors directly. The insurance protection available to bank depositors remains capped at Rs 5 lakh per person per bank, covering money kept in savings, current, fixed, and recurring deposit accounts with insured lenders.

This higher limit was introduced in 2020, following widespread concern over prolonged delays faced by depositors in accessing funds when banks ran into trouble. Since then, deposit insurance has been a key pillar in maintaining depositor confidence, especially in the cooperative banking sector.

This means that even if a bank goes bust, the insurance will protect your savings up to Rs 5 lakh. While established banks have very little chance of default, in the past, there have been instances of default of cooperative banks, in the past and the deposit guarantee insurance comes to the aid of depositors in such instances.

People familiar with the decision said the current flat premium rate will continue to act as a ceiling. The risk-based structure will operate within this limit to avoid placing excessive pressure on weaker banks.

Regulators have been reviewing the deposit insurance framework as part of broader efforts to improve financial stability. Linking premiums to risk is expected to incentivise better governance and balance-sheet discipline among banks, while also strengthening the insurance fund over time.

A stronger insurance pool is also seen as critical for faster payouts to depositors if a bank is placed under restrictions or resolution.

Details on the methodology, including how risk will be measured and when the new framework will be rolled out, are expected to be issued separately. For depositors, there is no change in coverage or claims process.