Understanding RBI's New Deposit Insurance Model

Deposit insurance: RBI’s New Model

1. What Is Deposit Insurance?

Deposit insurance is a safety net for bank customers. If a bank collapses, depositors are guaranteed protection up to a certain limit. In India, this limit is ₹5 lakh per depositor per bank, covering both principal and interest.

2. How Does the Current System Work?

Currently, all banks pay the same flat premium of 12 paise per ₹100 of deposits to the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of RBI. This treats well-managed banks and weaker banks the same, regardless of their risk levels.

3. What Change Has RBI Proposed?

RBI plans to shift to a risk-based premium model:

- Stronger banks (with sound risk management) will pay lower premiums.

- Weaker banks (with higher risks) will pay higher premiums.

- No bank will pay more than the current ceiling of 12 paise per ₹100.

4. Why Is This Change Important?

The flat-rate system has existed for decades but does not reward banks for managing risks efficiently.

A risk-based model:

• Encourages banks to maintain strong financial health.
• Reduces unfair burden on well-run banks.
• Makes weaker banks bear responsibility for their higher risk profile.

5. What Does It Mean for Customers?

The insurance protection of ₹5 lakh remains unchanged.

Customers do not have to pay extra.

Indirectly, this reform ensures that banks have stronger incentives to remain financially stable, benefiting depositors in the long run.

6. When Will This Become Effective?

The new premium system will come into force from the next financial year after detailed RBI guidelines are released.

Quotation for Aspirants

“Sound banking is not just about protecting money, but about building trust that safeguards society’s future.”