The Reserve Bank of India (RBI) has flagged off a long-overdue banking reform by ushering in risk-based deposit insurance premiums, in place of a one-size-fits-all premium, from April 2026. Several expert panels, starting from the Narasimham Committee in 1998, have argued for the Deposit Insurance and Credit Guarantee Corporation (DICGC) to move from its flat premium to a risk-based regime to avoid moral hazard.
The idea met with pushback from co-operative banks on the ground that it would increase their premium burden. Others argued that risk-based premia would send disquieting signals to depositors on the soundness of banks. The RBI seems to have addressed both issues. Under the new system, instead of paying a flat premium at 0.12 per cent of assessable deposits, banks will pay differential premia based on their risk category, as assessed by DICGC. Banks will be segregated into two tiers. Under Tier 1 which will apply to scheduled commercial banks (SCBs), banks will be assigned risk ratings based on RBI’s supervisory assessment, quantitative measures and the potential loss to DICGC from their failure. For Tier 2 banks (co-operative banks and regional rural banks), the risk rating will only use quantitative measures and potential loss to DICGC.
The RBI is perhaps constrained in exercising supervisory oversight on 1800-odd co-operative banks. For risk grading, a bank’s capital adequacy, asset quality, liquidity, profitability ratios and RBI supervisory ratings for the last financial year will be used. However, reliance on back data may lead to late recognition of problems. Similarly, assessing a bank’s governance based on its adherence to Board composition norms alone, seems inadequate. But since a more thorough assessment could lead to delays, the RBI has probably taken the middle path. Once banks are bucketed into risk categories, the riskiest ones will pay premium at the card rate (0.12 per cent of assessable deposits) and those rated less risky will pay 0.11 per cent, 0.10 per cent or 0.08 per cent, with discounts based on vintage. This system ensures that large SCBs earn significant savings on deposit insurance premia, while smaller/riskier banks do not face any immediate increases in premium outgo.
On disclosure, the RBI has mandated that banks stop disclosing the quantum of deposit insurance premia paid, with DICGC required to keep its risk ratings confidential. This may prevent systemic risks. But it is unfair to depositors as they cannot demand higher returns from riskier banks. However, the impact on DICGC’s surpluses and balance sheet needs to be closely monitored. After the fivefold increase in deposit insurance in FY20, DICGC has seen its premium income rise at a much slower pace than insured deposits. It believes that its Deposit Insurance Fund at 2.3 per cent of insured deposits is in line with global norms. The fact remains that the DICGC has not burnt its fingers, as the RBI usually steps in with pre-emptive mergers/takeovers of banks in trouble.
Published on February 12, 2026