RBI MPC Proposes Risk-Based Deposit Insurance Premium For Banks

The Reserve Bank of India proposed to introduce risk-based deposit insurance premium with the currently applicable flat rate of premium as the ceiling. "This will incentivise sound risk management by banks and reduce premium to be paid by better rated banks," Sanjay Malhotra, RBI Governor said, in his statement on Wednesday.

Deposit insurers collecting premiums from member financial institutions choose between adopting a flat-rate premium system that seeks to differentiate premiums on the basis of individual bank risk profiles.

Deposit Insurance and Credit Guarantee Corporation (DICGC), under the DICGC Act, 1961 has been operating the deposit insurance scheme since 1962 on a flat rate premium basis. At present, the banks are charged a premium of 12 paise per Rs 100 of assessable deposits.

While the existing system is simple to understand and administer, it does not differentiate between banks based on their soundness. It is, therefore, proposed to introduce a Risk Based Premium model which will help banks that are more sound to save significantly on the premium paid, the RBI explained. The central bank will issue a detailed notification, effective from the next financial year.