Risk-Based Premiums to Reward Strong Banks

The Reserve Bank of India (RBI) has unveiled a new Risk-Based Premium (RBP) framework for deposit insurance, a reform expected to strengthen the profitability of financially robust banks while encouraging improved risk discipline across the sector. According to a report by ICRA, the revised mechanism marks a significant shift in the pricing of deposit insurance in India and could modestly enhance returns for well-managed institutions.

Announced on 6 February 2026, the framework replaces the longstanding flat premium rate of 12 paise per ₹100 of assessable deposits (AD) with a differential structure linked to each bank’s risk profile. Under the new system, banks will be classified into risk categories based on internal ratings developed by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Institutions with stronger balance sheets, stable operating histories and minimal claims on the deposit insurance fund will pay lower premiums, while weaker or higher-risk banks will face steeper contributions.

Profitability Impact

ICRA estimates that stronger banks—particularly those with long track records and no history of significant stress events—could see an improvement in Return on Assets (RoA) of nearly 4 basis points (bps). At the aggregate level, lenders accounting for roughly 80 per cent of total banking deposits are expected to qualify for discounted rates, potentially translating into a sector-wide RoA uplift of about 3 bps.

Although seemingly modest, such incremental gains are meaningful in a competitive banking environment where margins remain under pressure from regulatory costs and capital requirements.

Key Changes in the Premium Structure

Under the Tier-1 model—applicable to scheduled commercial banks excluding regional rural banks—Category A institutions may see their premium rate reduced to 8 paise per ₹100 of assessable deposits. This represents a maximum discount of 33.33 per cent from the earlier flat rate. In addition, a ‘vintage incentive’ of up to 25 per cent may be granted to banks that have contributed to the Deposit Insurance Fund for extended periods without major stress episodes.

Broader Implications

ICRA notes that any future increase in the deposit insurance limit—currently capped at ₹5 lakh per depositor per institution—could raise overall premium costs for banks. However, stronger institutions would likely offset such pressures through the discounts embedded in the RBP system. The revised pricing structure could, therefore, create room for policymakers to consider enhancing depositor protection without unduly burdening the sector’s healthiest players.

The DICGC will implement the new framework from 1 April 2026, subject to RBI approval. As of 31 March 2025, India’s insured deposit to assessable deposit ratio (IDR) stood at 41.5 per cent, placing the country among the top ten globally in terms of deposit insurance coverage.

Analysts believe the shift towards risk-based pricing aligns India’s deposit insurance regime more closely with international best practice, promoting financial stability while rewarding prudent governance and sound risk management.