RBI Approves Risk-Based Deposit Insurance Framework

The Central Board of Directors of the Reserve Bank of India (RBI) has approved a risk-based deposit insurance framework for banks, marking a shift from the existing flat-rate premium system operated by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Key Highlights

• The proposed framework will link deposit insurance premiums to the financial soundness of banks.
• Financially stronger banks are expected to pay lower premiums, while weaker banks may pay the same or higher premiums.
• The move aims to incentivise better risk management and strengthen overall banking sector stability.

Existing Deposit Insurance System

• DICGC has been operating a flat-rate premium-based deposit insurance scheme since 1962.
• At present:
  • Deposit insurance coverage: ₹5 lakh per depositor per bank
  • Coverage enhanced from ₹1 lakh to ₹5 lakh with effect from February 4, 2020
  • Premium charged: 12 paise per ₹100 of assessable deposits

Legal Provision

• As per the August 2021 amendment to Section 15(1) of the DICGC Act, 1961:
  • DICGC can increase the premium up to 15 paise per ₹100 of deposits
  • Such an increase requires prior approval of the RBI
  • Decision must consider:
    • Financial position of DICGC
    • Overall interests of the banking sector

Proposed Risk-Based Premium Structure

• Sound banks: Likely to be charged lower than 12 paise per ₹100
• Not-so-sound banks:
  • May continue to pay 12 paise per ₹100, or
  • Could be charged the maximum 15 paise per ₹100

Scope of Deposit Insurance

• Types of deposits covered:
  • Savings, fixed, current, recurring deposits, including accrued interest
• Banks covered:
  • Public, private and foreign commercial banks
  • Regional Rural Banks (RRBs)
  • Cooperative banks
  • Local Area Banks operating in India