Risk-Based Deposit Insurance Framework Could Reshape Bank Behaviour

For years, India’s banking system operated on the assumption that all banks, regardless of how they behave, should pay the same price for deposit insurance. That changes from April 1, 2026.

Under the new Risk-Based Premium framework, banks will no longer be charged a uniform fee simply for existing. Their insurance costs will now depend on how they actually run their institutions, how strong their capital is, how clean their books are, and how seriously they treat regulation. Those that manage risk well will pay less. Those that do not will pay more.

The shift is meant to fix a basic flaw in the old model. When everyone is charged the same, there is little financial incentive to improve risk controls.

Deposit insurance is administered by the Deposit Insurance and Credit Guarantee Corporation, a wholly owned RBI subsidiary, and has existed since 1962. The cover has been raised over time, from ₹1,500 at inception to ₹500,000 per depositor, including both principal and interest.

It applies to savings, fixed, current and recurring deposits across commercial banks, regional rural banks, foreign bank branches, local area banks and co-operatives. The premium, however, has so far been uniform.

As of March 2025, the insurance fund stood at ₹2.29 trillion. Of the ₹241.08 trillion in total deposits, ₹100.12 trillion falls within the insured limit. Since inception, ₹102.71 billion has been paid out to over 306,000 depositors.

Global Benchmarks
India’s deposit insurance system covers 1,982 banks and protects 97.6% of deposit accounts and 41.5% of deposit value, well above global averages. This is mainly a function of India’s large base of small deposit accounts.

Internationally, deposit insurance practices are shaped by the International Association of Deposit Insurers, set up in 2002 and housed at the Bank for International Settlements in Basel. Its Core Principles, first issued in 2009 and revised in 2014, are widely used as reference points by regulators.

Around 110–120 countries now run formal deposit insurance schemes, though the limits vary sharply. The US covers deposits up to $250,000, China up to CNY 500,000, Japan up to JPY 10 million, Germany up to €100,000, and the UK up to £120,000.

Risk-based pricing, however, is not new. The US moved to it in 1991, Canada in 1999, and much of Europe in the early 2000s. Its adoption gathered pace after the 2008 crisis, as regulators reassessed how insurance funds were priced.

Flat-rate premiums offer little incentive for banks to strengthen risk controls. Recognising this, the RBI proposed the RBP framework in its October monetary policy, aiming to link premiums more closely to institutional soundness.

From April 2026, banks will pay differentiated premiums, while the base rate of 12 paise per ₹100 of deposits will remain unchanged. Two discounts will apply: a risk-based discount of up to 33.33%, reducing the rate to 8 paise, and a “vintage” benefit linked to long-term stability.

Risk-Based Assessment
The framework adopts a two-tier rating methodology. Tier I applies to scheduled commercial banks, excluding regional rural banks, and combines RBI supervisory ratings, quantitative indicators, and potential loss to the Deposit Insurance Fund.

Tier II covers other banks, with greater emphasis on quantitative metrics. Payment banks and local area banks will continue paying the standard rate of 12 paise per 100 until sufficient data enables risk-based pricing.

Quantitative assessment for both Tier I and Tier II banks will use audited financial data, including capital adequacy, asset quality, liquidity, profitability, and balance sheet composition. For Tier II banks, governance parameters—such as board structure and key management positions—will also carry weight.

Based on overall scores, banks will be classified into four categories: A, B, C, and D—with premiums of 8, 10, 11, and 12 paise respectively. Category D banks will receive no discount.

Vintage Benefit
Banks with long, distress-free operating histories will receive additional incentives. Under Tier I, a 1% discount will be granted for each completed year, capped at 25% for banks with at least 25 years of stable operations and no major restructuring.

For Tier II, similar benefits apply to RRBs, rural co-operatives, and large urban co-operative banks with deposits above ₹100 billion.

No incentive will apply if a bank has faced serious risk events such as moratoriums, administrative intervention, withdrawal restrictions, or reconstruction under the Banking Regulation Act. In such cases, benefits will be recalculated from the date of distress.

The vintage incentive—discounting premiums for long-term, distress-free contributions to the DIF is unique to India's DICGC RBP framework.  According to IADI/World Bank surveys and IMF analyses, no other country explicitly employs a tenure-based "vintage" discount in global deposit insurance schemes.

Hence, the RBP framework is expected to sharpen risk sensitivity, promote stronger governance, and align insurance costs with institutional resilience. Premium rates and discount calculations will remain confidential and cannot be used for marketing or competitive positioning.

By linking depositor protection to risk discipline, the new system represents a timely step towards strengthening India’s banking architecture and reinforcing public confidence.