Reserve Bank of India (RBI) approves Risk-Based Deposit Insurance

• The Central Board of the Reserve Bank of India (RBI) has approved a Risk-Based Deposit Insurance Premium Framework.
• This framework will replace the existing flat-rate deposit insurance premium system.
• Under the current flat-rate system, banks pay 12 paise per ₹100 of deposits as insurance premium.
• Deposit insurance refers to protection of depositors’ money in the event of a bank failure.
• The main objective of deposit insurance is to safeguard depositors against bank failure.

Meaning of Risk-Based Deposit Insurance Premium Framework

• A risk-based deposit insurance premium framework is a system where insurance premiums depend on the bank’s risk profile.
• A bank’s risk profile reflects its financial health, governance quality, and risk management practices.
• Safer and well-managed banks are required to pay lower insurance premiums.
• Riskier banks with weaker financial positions are required to pay higher insurance premiums.
• The framework aims to incentivise sound risk management among banks.
  • Incentivise means encouraging positive behavior through financial benefits.
• The framework aims to reward prudent behavior by reducing insurance costs for responsible banks.
  • Prudent behavior refers to cautious and disciplined banking practices.
• The framework seeks to reduce moral hazard in the banking system.
  • Moral hazard refers to excessive risk-taking due to the presence of safety nets.
• Higher premiums discourage banks from taking excessive financial risks.

Deposit Insurance Framework in India

• Deposit insurance in India is administered by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

• DICGC is the institution responsible for insuring bank deposits in India.
• DICGC functions under the provisions of the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
• DICGC is a wholly owned subsidiary of the Reserve Bank of India.

• The maximum deposit insurance coverage provided by DICGC is ₹5 lakh per depositor per bank.
• The insurance premium is paid by banks and not by depositors.
• DICGC provides insurance coverage for savings deposits, fixed deposits, current deposits, recurring deposits, foreign governments, Central and State Governments.
• Insurance coverage extends to all commercial banks operating in India.
• Insurance coverage includes branches of foreign banks functioning in India, local area banks, regional rural banks, State cooperative banks, Central cooperative banks, and Primary cooperative banks.
• Insurance coverage excludes primary cooperative societies.