Banking pads up to cover a new ground

Shifting to a system of risk-based deposit insurance may over time force banks to become even more prudent and mindful of their finances, reports Raghu Mohan

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Of the 22 additional measures announced by Mint Road after its Monetary Policy Committee's deliberations, the shift to risk-based deposit insurance framework is one of the most significant in the post-reform period. Think of it as tightening the screws on banks’ liability side. What's less known is that this architecture — radical as it may appear — is not a new concept. It was flagged by the Jagdish Capoor working group on Reforms in Deposit Insurance, 1999; the Committee on Credit Risk Model, 2006 set up by the Deposit Insurance and Credit Guarantee Corporation (DICGC); and the Jasbir Singh Committee on Differential Premium System for Banks, 2015. Incidentally, the Singh committee was set up after the issue of risk-based premium was discussed at a Reserve Bank of India (RBI) board meeting on October 16, 2014. It was felt that DICGC could “explore the possibility of putting in place a differential premium within the cooperative sector, linking it to governance and risk profile of cooperative banks.”

So, what is one to make of this approach to deposit insurance after all these years? Says Anand Sinha, former deputy governor of RBI (and senior advisor, Cyril Amarchand Mangaldas): “This is more equitable as it will require riskier banks to pay more (deposit insurance premium) than those which are sound. Importantly, it will provide an incentive to lower-rated banks to improve their health reflected in their ratings. These ratings, like supervisory ratings, will not be public. While risk-based deposit insurance has been discussed for a long time, the timing of its introduction is opportune as the banking system is in much better shape.” A point has to be made clear: It is not that weaker-rated banks will pay more than the current uniform premium of 12 paise for every ₹100 of deposits. But this will be the cap, and the better-rated banks will pay lower.

Glide path