RBI moves to triple deposit cover as small banks wobble

MUMBAI — A draft framework circulating among India's banking regulators would raise the ceiling on insured deposits to ₹15 lakh per account and, for the first time, charge banks premiums calibrated to how much risk they carry — the most significant rewrite of the country's deposit safety net in a generation.

Two officials familiar with the discussions said the Reserve Bank of India and the Deposit Insurance and Credit Guarantee Corporation have spent the past four months stress-testing the proposal against the cooperative-bank failures that rattled depositors in three states last year. The ceiling, frozen at ₹5 lakh since 2020, would jump to ₹15 lakh — covering roughly 97 percent of accounts by number, the officials said.

The change sounds technical. It is not. It quietly shifts the cost of bank fragility from the depositor onto the banks themselves, and it does so just as a fresh cluster of urban cooperative lenders is showing strain.

What the draft proposes

Under the present system every insured bank pays a flat 12 paise per ₹100 of deposits, regardless of how recklessly it lends. A village cooperative with a thin capital buffer pays the same rate as DBS or HDFC. The draft would replace that with a four-band schedule, with the riskiest lenders paying close to double the safest, according to a person who has seen the slides.

Risk would be scored on a blend of capital adequacy, the share of loans more than 90 days overdue, and a supervisory rating the RBI already assigns but has never published. A bank that lets its bad-loan ratio drift above 6 percent would climb a band the following year, raising its premium automatically.

The DICGC's fund stood at about ₹2.1 lakh crore at the end of March, equal to roughly 2 percent of insured deposits. Tripling the cover without re-pricing premiums would have drained that reserve ratio toward levels the corporation considers unsafe — which is why the two moves are bundled together rather than staged.

Why now

The timing is not academic. Since February, depositors at two mid-sized urban cooperative banks in Maharashtra and Karnataka have faced withdrawal caps after the RBI imposed directions to stem outflows. Branch queues, photographed and shared widely, revived memories of the 2019 collapse that left thousands of pensioners locked out of their savings.

A flat premium tells a well-run bank to subsidise a badly-run one. That is precisely the wrong signal when confidence is the only thing keeping small lenders alive, said Vikram Sundaram, a former deposit-insurance economist now advising a Mumbai think tank.

Larger private banks have signalled cautious support, partly because risk-rating would lower their own premiums relative to weaker peers. The lobby for cooperative banks, predictably, is alarmed: a steeper premium lands hardest on exactly the institutions least able to absorb it, potentially accelerating the consolidation the RBI has long wanted but rarely says aloud.

The political arithmetic

Raising the cover to ₹15 lakh is the kind of number a finance minister likes to announce. It is legible, generous and pro-saver. The risk-pricing, by contrast, is the sort of reform that generates no applause and plenty of quiet resistance from cooperative banks woven into local political networks across western and southern India.

Officials said the RBI hopes to release a discussion paper before the monsoon session of Parliament, with a phased rollout that would give the weakest banks two years to adjust their premiums upward. Whether that gradualism survives contact with the political calendar is another matter.

For depositors, the headline is simple and welcome: more of their money would be protected. For the banks, the message buried in the fine print is sharper. After decades in which the cost of failure was socialised, India is preparing to make fragility expensive — and to put a price tag on the difference between a bank that lends prudently and one that does not.