RBI proposes risk-based pricing for deposit cover

RBI has proposed risk-based pricing for bank deposit insurance. The reasoning is that stressed banks could face rapid deposit withdrawals through digital channels, as quick dissemination of information through social media could accelerate bank runs.

“The implementation of risk-based premium for deposit insurance merits consideration. By tying insurance premiums to the level of risk posed by individual financial institutions, deposit insurers can incentivise banks to adopt stronger risk management practices,” RBI deputy governor Swaminathan J said.

He was speaking at a conference organized by the International Association of Deposit Insurers.

The deputy governor’s statement comes at a time when there is a fight for deposits among banks with credit growth outpacing deposits. “The 24/7 availability of online and mobile banking can heighten vulnerabilities, potentially accelerating bank runs and liquidity crises during periods of stress. Further, this behavior is amplified with the emergence of digital sources of influence, such as social media platforms,” said Swaminathan.

At present, the Deposit Insurance and Credit Guarantee Corporation provides insurance cover up to Rs 5 lakh per depositor which is payable when a bank fails.