Proposed changes in deposit insurance are set to reshape how banks contribute to the system that protects its depositors. With the Deposit Insurance and Credit Guarantee Corporation (DICGC) introducing a new risk-based premium framework to come into force from April, where banks pay deposit insurance premiums based on how risky they are assessed to be. This new framework is a significant departure from the earlier mandate where a flat rate (12 paisa per Rs. 100 of assessable deposits) was applicable across banks. The conversation extends beyond how premiums are calculated to more fundamental questions about the purpose and governance of deposit insurance in India.
In a banking system where public sector banks dominate, government ownership is significant, and regulatory oversight continues to evolve, it becomes important to examine whether the current approach aligns with the realities of the sector. This includes questions around the role of deposit insurance, the nature of risk, and the institutional structures that support financial stability.
The DICGC functions as an extended arm of the Reserve Bank of India (RBI), the country’s banking regulator. However, the present framework governing deposit insurance raises fundamental concerns, particularly in the context of Public Sector Banks (PSBs).
In the case of PSBs, the Government of India is the majority owner. Yet, a serious deficit persists in corporate governance structures. Many PSBs continue to function without fully constituted boards. Critical gaps remain, such as the absence of directors from key professional categories, including Chartered Accountants. Consequently, essential committees—particularly the Audit Committee, risk management committee and other sub-committees mandated under governance norms—are either non-functional or inadequately constituted.
These shortcomings are not incidental but systemic, and responsibility squarely rests with the Government as the owner. Weak governance architecture in PSBs undermines regulatory intent and compromises accountability.
In this backdrop, the rationale for charging deposit insurance premiums on PSBs deserves serious reconsideration. Deposits in PSBs effectively carry an implicit sovereign backing, given government ownership. Imposing insurance premiums in such cases appears redundant and economically unjustified.
In contrast, deposit insurance has clear relevance in the case of private sector banks and urban cooperative banks, where sovereign backing is not explicit. However, even in the private sector, historical experience indicates that the Government and public institutions have consistently intervened to safeguard systemic stability. Several distressed banks—including United Western Bank, Miraj State Bank, and Karad Bank—were merged with PSBs. Others, such as Ganesh Bank of Kurundwad and Sangli Bank, were rescued through mergers with stronger private banks. More recently, the crisis at Yes Bank saw intervention led by State Bank of India, while the collapse of IL&FS required coordinated institutional support, including from SBI and Life Insurance Corporation of India. Similarly, IDBI Bank was stabilised through LIC intervention.
These precedents suggest that deposit insurance coverage in private sector banks often remains largely theoretical, as systemic considerations prompt direct or indirect sovereign intervention. In practice, DICGC protection has been meaningfully invoked mainly in the case of urban cooperative banks.
Given this context, there is a compelling need for the Government to evolve a differentiated and rational policy framework, particularly for urban cooperative banks, where depositor vulnerability is more pronounced.
It is also pertinent to note that DICGC has accumulated reserves exceeding ₹1 lakh crore. There is growing apprehension that these reserves may eventually be transferred to the RBI and, by extension, to the Government. Such a move would raise important questions about the purpose and integrity of the deposit insurance framework.
The current situation reflects a degree of policy ambiguity, possibly linked to attempts to design an alternative mechanism to the Financial Resolution and Deposit Insurance Bill, which was earlier set aside due to widespread stakeholder resistance.
In light of these concerns, it is imperative that the Government undertakes a comprehensive review of the deposit insurance policy. The objective should be to ensure clarity, fairness, and alignment with ground realities, while strengthening governance standards across all segments of the banking system.
Devidas Tuljapurkar is the Chairman of the Banking Education Training & Research Academy
