Risk-Based Deposit Insurance Premium for Banks

Why in News?

India is shifting from a uniform deposit insurance premium to a risk-based premium (RBP) system, where banks pay insurance premiums according to their risk profile.
This also sets the stage for a likely increase in deposit insurance cover from ₹5 lakh to possibly ₹15 lakh.

What is Deposit Insurance?

• Protects bank depositors if a bank fails.
• Currently covers up to ₹5 lakh per depositor per bank.
• Managed by DICGC (established in 1962).

Key Change: Risk-Based Premium (RBP)

Earlier system:

• Flat premium of 12 paise per ₹100 deposits for all banks.

New system:

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• Premium linked to bank risk rating.
• Better-rated banks pay lower premiums, riskier banks pay closer to the maximum.

Proposed premium structure (per ₹100 deposits):

• Rating A → 8 paise
• Rating B → 10 paise
• Rating C → 11 paise
• Rating D → 12 paise (cap)

Two-Tier Framework

• Tier I: Scheduled commercial banks (excluding RRBs).
• Tier II: Regional Rural Banks (RRBs) and cooperative banks.

Objectives

• Encourage prudent risk management by banks.
• Strengthen financial stability.
• Align insurance cost with bank risk.