Next year’s shift to risk-based deposit insurance could help depositors make better banking choices

This decision was taken on Friday and it follows RBI’s monetary policy statement of October 2025, in which the central bank had proposed a model that abandons a flat premium rate in favour of payments that vary by risk—in this case, of a regular bank failing to meet its obligations to depositors.

With this shift slated to come into effect from 2026-27, financially sound banks can expect to save on the price they pay. In general, it should incentivize banks to manage their risks better, thereby improving the overall soundness of India’s banking industry.

Currently, Deposit Insurance and Credit Guarantee Corporation (DICGC) charges all banks a flat premium of 12 paise for every ₹100 of assessable deposits. This framework, in vogue since 1962, goes against the basic principle of insurance that says the premium—or price for the service—must be related to the degree of risk; higher premium rates for life coverage in war zones, for instance.

In the context of banks, the best way to keep deposits secure is by means of a banking system that has no bank failures. But that is a utopian ideal. Like fiat money without an issuer, it does not exist.

Modern banking is based on a fractional reserve system, under which banks retain a fraction of their deposits and lend the rest. But bank deposits are repayable on demand, while the loans they extend are not. In the real world, thus, occasional bank failures are unavoidable.

Yet, for the system’s survival, depositors must trust that their bank will be able to repay their deposits ‘on demand.’ Should this faith get shaken, it could result in a ‘run on the bank’ (rapid withdrawal of deposits), which, if not nipped in time, could lead to its collapse. Hence the need for deposit insurance.

Two questions follow. One, the quantum of insurance. And two, its pricing or premium. A related issue is how the regulator can guard against banks taking advantage of a situation, like at present, where the premium paid has no relation to their risk profile. After all, it is the regulator’s role to protect the interests of depositors while ensuring the financial sector’s stability.

Full insurance cover for deposits may seem like an ideal solution. But it is sub- optimal. It gives rise to what economists call ‘moral hazard.’ If banks know depositors will be repaid regardless of how they conduct their business, they have an incentive to chase risky assets in pursuit of higher profits. While the quantum of insurance is frequently debated—it was hiked from ₹1 lakh to ₹5 lakh in 2020—the related issue of the premium to be charged has seldom received the attention it deserves.

That has finally been addressed. But it isn’t enough.

As a report by the Bank of International Settlements argues, the criteria used for premium calculations should be made transparent. In the Indian context, where RBI has steadfastly refused to make its bank-inspection reports public, next year’s shift to a risk-based framework for deposit insurance, combined with disclosure of its modalities, would have the added advantage of lifting a veil of secrecy around the health of our banks.

If depositors know how banks are placed on a scale of risk, they could make better informed decisions on where to put their hard earned money. It could be a win-win.