The Reserve Bank of India (RBI) has proposed to introduce a risk-based premium model for deposit insurance where stronger banks pay less and weaker ones more.

This is a departure from the existing flat-rate premium model for deposit insurance, taken to incentivize sound financial management.

The shift towards differentiating insurance costs, based on the financial health and soundness of individual banks, will be put into effect from the next financial year. 

Under the current Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, banks are charged the same insurance rate of 12 paise per Rs 100 of deposits.

RBI Governor Sanjay Malhotra said the goal is to “incentivize sound risk management by banks and reduce premium to be paid by better rated banks".

While the flat-rate system is simple to administer, the RBI feels there is need now to distinguish between banks based on their risk profile. Under the new model, financially robust banks will have a lower premium payout, fostering better risk management across the sector. 

What doesn’t change, however, is the ceiling of 12 paise per Rs 100, with no banks paying more premium than this. The well-rated banks will need to pay less than this, which will lower their insurance costs and put them at a competitive advantage over banks with riskier profiles.  

The weaker, less financially sound banks will thus be driven to clean up their books, maintain adequate capital buffers and improve their risk management. 

Anil Gupta, senior VP and co-group head at ICRA, believes that larger, well-rated banks can increase their competitive advantage if they decide to pass on the savings from reduced insurance costs to customers through higher deposit rates. 

This may, according to him, pressure smaller and weaker banks, adversely impacting their market share. To remain competitive, these banks might be forced to offer higher deposit rates despite facing elevated deposit insurance costs, he said.

For depositors, nothing changes under the new risk-based model. The deposit insurance coverage limit continues to be Rs 5 lakh (earlier limit was Rs 1 lakh until February 2020) per depositor, per bank, which includes both the principal and interest. This protection is provided across savings accounts, current accounts, fixed deposits and recurring deposits.

Customers want the deposit insurance coverage limit to further increase from Rs 5 lakh so that they are protected in case banks financially collapse. There have been several instances where banks like Yes Bank and erstwhile PMC Bank have run into deep financial trouble but the RBI has found models to bail them out so that the deposits of customers are protected. 

As per DICGC data until March-end 2025, 97.6% of all deposit accounts in India are fully protected under this coverage.

Detailed guidelines outlining the parameters and implementation mechanism of the new risk-based premium model will be issued soon.

Along with the other reforms proposed by the RBI in its monetary policy meeting, the regulator is making a push for stronger banks. The announcement of the Expected Credit Loss (ECL) provisioning framework and revised Basel III capital adequacy norms from April 2027 are steps in this direction.