RBI to introduce risk-based deposit insurance premium; flat rate to act as ceiling

RBI MPC Meeting

The Reserve Bank of India (RBI) on October 1 proposed a shift to a risk-based deposit insurance premium structure, moving away from the existing flat-rate system that treat all banks alike.

The current flat premium would serve as the upper ceiling, while stronger banks with healthier balance sheets will be able to pay less, RBI governor Sanjay Malhotra said while sharing the outcome of the monetary policy committee (MPC) meeting.

At present, all banks pay the Deposit Insurance and Credit Guarantee Corporation (DICGC) a uniform premium, which is set at 12 paise per Rs 100 of deposits, irrespective of their risk profile.

The proposed change aims to align India’s system more closely with international practices, where deposit insurers use risk-based premiums to encourage prudent financial management, the governor said.

The new framework is designed to “incentivise sound risk management” while easing the burden on better rated banks, Malhotra said. Linking premiums to factors such as capital adequacy, asset quality and governance is expected to introduce greater market discipline.

The flat rate will act as the ceiling, ensuring that no bank pays more than what it is currently charged.

Currently, deposits in banks are insured by DICGC for up to Rs 5 lakh per depositor, per bank. This cover, which includes both principal and interest, was raised from Rs 1 lakh in 2020 in the wake of bank failures such as Punjab and Maharashtra Cooperative (PMC) Bank, to enhance depositor confidence.

The RBI clarified the latest proposal does not change the insurance cover limit but instead focuses only on how premiums are levied on banks to sustain the system.

The move comes at a time when the central bank is rolling out a series of reforms to strengthen banking sector resilience, including the implementation of expected credit loss provisioning, revised Basel III capital norms from 2027, and tighter governance standards under the amended banking law.

The RBI left the repo rate unchanged at 5.5 percent for the second consecutive meeting and maintained neutral stance.