MUMBAI: 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 organised by the International Association of Deposit Insurers on Tuesday.
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 behaviour 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. There have been recommendations that RBI (through the DICGC) shift to risk-based pricing earlier too.However, some bankers feared that describing a bank as weak and raising deposit premium rates might have a self-fulfilling impact.
Swaminathan has suggested that deposit insurers can 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 said.
“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 organised by the International Association of Deposit Insurers on Tuesday.
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 behaviour 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. There have been recommendations that RBI (through the DICGC) shift to risk-based pricing earlier too.However, some bankers feared that describing a bank as weak and raising deposit premium rates might have a self-fulfilling impact.
Swaminathan has suggested that deposit insurers can 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 said.
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