The RBI will now charge banks different deposit insurance fees based on how risky they are, allowing safer banks to pay less premium.

IMAGE: A man stands in front of the Reserve Bank of India (RBI) logo inside its headquarters in Mumbai. Photograph: Francis Mascarenhas/Reuters

Risk decides insurance cost

The Reserve Bank of India (RBI) has announced the introduction of a risk-based premium (RBP) framework for deposit insurance, which will come into effect from April 1.

The framework, which replaces the flat-rate premium system in place since 1962, will be reviewed at least once every three years.

The move is aimed at incentivising sound risk management practices by banks and lowering premium costs for stronger institutions.

Currently, banks pay a uniform premium of 12 paise per ₹100 of assessable deposits.

End of flat-rate pricing

While the flat-rate system is easy to administer, it does not differentiate between banks based on their financial soundness. 

Under the RBP regime, banks will be classified into four risk categories — A, B, C and D — with Category A representing the lowest risk.

Premium rates will range from 8 paise to 12 paise per ₹100 of assessable deposits, offering a discount of up to 33.3 per cent to the strongest banks.

The risk categorisation will be based on the latest available audited financial year-end data and supervisory ratings.

Banks will be required to pay the insurance premium in advance for the first half of FY27 (April-September 2026) by May 31, based on assessable deposits as of March 31. 

If supervisory ratings or financial data for the relevant year are unavailable, the most recent available data will be used.

For example, if the supervisory rating for March 2025 is not available, the rating as of March 2024 will be considered. A similar approach will apply for the second half of FY27.

Discounts for strong banks

The framework adopts a two-tier rating methodology.

Scheduled commercial banks, excluding regional rural banks (RRBs), will be assessed under a Tier-I model that incorporates supervisory ratings, quantitative financial indicators, and the potential loss to the Deposit Insurance Fund in the event of a bank failure.

Cooperative banks and RRBs will be evaluated under a Tier-II model, which places greater weight on financial ratios and governance-related indicators.

Payments banks and local area banks will continue to pay the card rate due to data limitations for risk-based pricing.

Urban cooperative banks will also continue to pay the card rate of 12 paise per ₹100 of assessable deposits.

Vintage incentive

The RBI has also introduced a vintage incentive under the framework. Banks with long-standing, stress-free operations will be eligible for a discount of 1 per cent for each completed year, capped at 25 per cent, provided there is no history of restructuring or major regulatory intervention.

For cooperative banks and Tier-IV urban cooperative banks, a flat vintage incentive of 25 per cent will apply after completion of 25 years of satisfactory operations without distress events.

“In the event of restructuring or major distress, the vintage incentive will be recalculated from the date of such restructuring or distress.

The end date of the financial year will be considered for computing the incentive,” the RBI said.

The existing requirement for banks to disclose the exact DICGC premium amount paid in the ‘Notes to Accounts’ will be discontinued.

Confidential risk ratings

The RBI will issue a separate circular on revised disclosure norms.

Banks will instead be required to state in their annual reports that the applicable deposit insurance premium was paid to DICGC within the prescribed timelines.

Any delay in payment will also have to be disclosed.

While DICGC will communicate a bank’s risk category to its managing director or chief executive officer in strict confidence, banks will not be permitted to disclose their risk ratings or use them for business solicitation.

Feature Presentation: Rajesh Alva/Rediff