RBI proposes risk-based pricing for bank deposit insurance
Aug 15, 2024
Synopsis
The RBI proposed risk-based pricing for deposit insurance to curb rapid withdrawals through digital channels. Deputy Governor Swaminathan suggested this would push banks to adopt better risk management practices. The existing insurance covers up to Rs 5 lakh per depositor, but the shift aims to handle digital vulnerabilities and prevent bank runs.
The Reserve Bank of India (RBI) has proposed implementing risk-based pricing for bank deposit insurance to address concerns about rapid deposit withdrawals through digital channels, which could be exacerbated by the fast spread of information via social media. RBI Deputy Governor Swaminathan J articulated this proposal at a conference organized by the International Association of Deposit Insurers.
"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 incentivize banks to adopt stronger risk management practices," said Swaminathan.
Swaminathan's statement comes amid a competitive race for deposits among banks, as credit growth currently surpasses the growth in deposits. He highlighted that the constant availability of online and mobile banking platforms could escalate vulnerabilities and potentially lead to bank runs and liquidity crises during stressful periods. Swaminathan also noted that this behavior is further intensified with the influence of digital sources like social media platforms.
Currently, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance cover up to Rs 5 lakh per depositor, which is payable when a bank fails. There have been earlier recommendations suggesting that the RBI, through the DICGC, should shift to risk-based pricing. However, there are concerns among some bankers that labeling a bank as weak and increasing deposit premium rates could have a self-fulfilling impact.
Swaminathan proposed that deposit insurers could mitigate technology risks by relying on supervisory rating assessments.
"By using these assessments as a basis for setting insurance premiums or determining intervention strategies, deposit insurers can ensure that their actions are informed by a comprehensive understanding of each institution's risk profile," he stated.
The move towards risk-based pricing aims to promote stronger risk management among banks and address the challenges posed by the digital era in the context of banking stability.
[The Economic Times]
