India to Shift to Risk-Based Deposit Insurance Premiums for Banks

India’s banking system is set for a structural change as deposit insurance premiums will soon reflect individual bank risk, replacing a uniform pricing model that has been in place for decades, as per Reuters. 

Risk-Linked Premium Framework Announced 

The Reserve Bank of India said banks will start paying deposit insurance premiums under a risk-based system from April 1.  

The framework will be implemented by the Deposit Insurance and Credit Guarantee Corporation. India has followed a flat-rate model since 1962, under which banks paid 12 paise per ₹100 of assessable deposits, irrespective of their risk profile. 

Under the revised approach, banks will be evaluated on financial and supervisory indicators including capital strength, asset quality, earnings, and liquidity.  

The assessment will also consider the potential loss a bank’s failure could impose on the deposit insurance fund, according to the RBI. 

Assessment Models and Premium Limits 

The central bank has introduced two assessment models. A Tier 1 model will apply to scheduled commercial banks, excluding regional rural banks, while a Tier 2 model will cover regional rural banks and cooperative banks. Risk-based premium adjustments will be capped, with incentives limited to 33.33% over the card rate. 

Banks may also qualify for a vintage incentive of up to 25% for longer contributions to the deposit insurance fund without major claim payouts. The final premium will reflect the combined impact of the risk-based and vintage incentives applied to the card rate. 

Treatment of Specific Bank Categories 

Payments banks and local area banks will continue to pay the card premium rate due to data limitations. Urban cooperative banks that are currently under supervisory or corrective action will be brought under the new framework only after they exit such restrictions, the RBI said. 

Read More: Indian Railways Sees Financial Rebound with 10-Year Revenue Surplus! 

Conclusion 

The move marks a shift from uniform pricing to a differentiated system aimed at encouraging stronger risk management practices across banks, while retaining safeguards for institutions with limited data or regulatory constraints. 

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