India is about to change how banks pay for deposit insurance, and this move could reduce costs for well-managed banks.
The Reserve Bank of India (RBI) is introducing a new system that links insurance premiums to how risky a bank is, instead of charging everyone the same amount.
This new rule will come into effect from April 1 and will be implemented by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
What is Changing in Deposit Insurance?
For more than 60 years, India followed a flat-rate system for deposit insurance.
Since 1962, every bank—strong or weak—paid the same premium.
Right now, banks pay 12 paise for every ₹100 of deposits, no matter how safely they operate or how well they manage risks.
The RBI believes this system is outdated because it does not reward banks that follow strong financial discipline.
Why the RBI is Introducing a New System
According to the RBI, the old method was easy to manage but unfair.
Banks that handled risks carefully paid the same premium as banks with weaker financial health.
Under the new framework, banks will be assessed using several factors, including:
Capital strength
Asset quality
Earnings performance
Liquidity position
Possible loss to the Deposit Insurance Fund if the bank fails
Banks that score better on these parameters will pay lower insurance premiums.
Two Risk Models for Different Banks
To make the system more accurate, the RBI has introduced two risk assessment models:
Tier 1 Model: For scheduled commercial banks, excluding regional rural banks
Tier 2 Model: For regional rural banks and cooperative banks
The RBI has also set limits to ensure stability.
Any reduction or increase in premium due to risk assessment will be capped at 33.33% of the base rate.
Banks can also earn a vintage incentive of up to 25%, provided they have contributed to the insurance fund for a long time without triggering major claims.
Both incentives will be applied to arrive at the final premium amount.
What This Means for Cooperative and Other Banks
Cooperative banks will also be brought under this new system. However:
Payments banks and local area banks will continue paying the flat rate due to limited data
Urban cooperative banks under corrective or supervisory action will be included only after they come out of these restrictions
The RBI believes this new approach will benefit the entire banking system, especially banks that focus on strong risk management and long-term financial stability.
Overall, the change marks a big shift toward a fairer and more performance-based deposit insurance system in India.
