ICRA believes RBI's new risk-based deposit insurance framework may boost bank profitability

The Reserve Bank of India’s (RBI) new risk-based premium (RBP) framework for deposit insurance is expected to strengthen the Indian banking system by promoting prudent risk management and offering cost advantages to well-managed banks, according to a report by ICRA.

The framework, set to replace the existing flat premium system, links deposit insurance costs to banks’ risk profiles and operational track records.

This differential pricing is designed to reward stronger banks with lower premiums, while encouraging weaker banks to improve governance and risk practices.

Stronger banks likely to see profitability gains

ICRA estimates that the revised norms could improve the return on assets (RoA) for stronger banks with long operational histories and no insurance claims by nearly 4 basis points.

At the system level, banks holding roughly 80% of sector deposits may qualify for higher premium discounts, translating into an aggregate RoA improvement of about 3 basis points for the banking sector.

The framework is expected to support profitability for well-managed banks amid pressures on net interest margins, giving them a slight cost edge over weaker peers.

How the framework works

Under the RBP framework, banks will be classified into risk categories based on supervisory ratings, quantitative assessments, and potential losses to the deposit insurance fund. Premium rates will vary by risk category, with additional incentives linked to operational vintage. Banks with stable operations and no major stress events could receive up to a 25% discount on premiums.

Potential impact of higher deposit insurance coverage

The report notes that the framework may allow for an increase in the deposit insurance limit, currently ₹5 lakh per depositor per bank. Expanding insured deposits could raise premium payouts and lower overall banking system profitability by an estimated ₹2,000–12,000 crore annually, moderating RoA by 1–4 basis points.

However, stronger banks benefiting from discounted premiums would likely offset much of this impact.

Implementation timeline

The RBP framework will be implemented by the Deposit Insurance and Credit Guarantee Corporation from April 1. It will apply to scheduled commercial banks, cooperative banks, and regional rural banks, marking a shift from the uniform premium rate of 12 paise per ₹100 of assessable deposits to a risk-linked pricing system.