RBI deputy chief moots risk-based premium for deposit insurance
Deposit insurers can incentivise banks to adopt stronger risk management practices by tying insurance premiums to the level of risk posed by individual banks, said Swaminathan J, Deputy Governor, RBI.
“The implementation of risk-based premium for deposit insurance merits consideration…. This approach not only enhances the overall stability of the financial system but also ensures that institutions with higher risk profiles contribute more to the insurance fund,” Swaminathan said at the international conference of the International Association of Deposit Insurers-Asia Pacific Regional Committee (IADI-APRC) in Jaipur.
Currently, the Deposit Insurance and Credit Guarantee Corporation (DICGC) collects premium from banks at a uniform rate — 12 paise per ₹100 of assessable deposit. Insurance cover is available for deposits up to ₹5 lakh.
The Deputy Governor noted that deposit insurers can mitigate technology risks through supervisory rating assessments that incorporate evaluation of a financial institution’s technological and operational resilience.
“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.
Moreover, deposit insurers, in collaboration with supervisors, need to develop advanced risk assessment tools that can effectively identify and quantify the impact of technology-induced risks on financial institutions.
This includes integrating cybersecurity risk assessments into the overall evaluation of financial institutions’ health, as well as monitoring the operational resilience of banks’ digital payment systems.
Crisis preparedness
Swaminathan said financial institutions need to update their crisis preparedness to be able to address and mitigate the fast-evolving risks introduced by technological advancements.
They should regularly assess their capability in accessing contingency funding within specified timeframes.
He noted that the events of 2023 in the US revealed that some of the affected banks were either unprepared to use the existing ‘Federal discount window’ as a source of liquidity or had not included it as one of the funding sources.
The Deputy Governor cautioned that the 24/7 availability of online and mobile banking can heighten vulnerabilities, potentially accelerating bank runs and liquidity crises during periods of stress, as customers may withdraw funds even outside traditional banking hours and without having to visit a bank branch.
Further, this behaviour is amplified by the emergence of digital sources of influence, such as social media platforms, which have proved their ability to drive, disseminate financial information, adverse or otherwise, and trigger a coordinated financial behaviour.
Swaminathan said financial institutions must exercise effective oversight of third parties and safeguard against potential vulnerabilities while taking other measures such as maintaining regular backups of their critical data to ensure operational resilience.
As the financial sector becomes more digitised, he emphasised that deposit insurers must work closely with regulators and supervisors to strengthen oversight mechanisms.
This includes regularly updating regulatory frameworks to incorporate emerging risks associated with digital payments, cybersecurity, and fintech innovations.
By adopting a proactive stance, deposit insurers can help ensure that the financial institutions under their purview are adequately prepared to manage these risks, thereby safeguarding depositor confidence.