MUMBAI: Repeabted coop bank failures – and the insurance payouts that follow – have reignited the debate over India’s one-size-fits-all approach to deposit insurance.
Industry experts and bankers are now calling for a risk-based premium structure, where banks pay premiums based on their risk profile instead of paying a flat rate.
The push comes after data revealed that while commercial banks contributed over 94 percent of the total insurance premiums collected by the Deposit Insurance and Credit Guarantee Corporation (DICGC) in FY24, all payouts settled during the year went to cooperative banks under regulatory restrictions or liquidation.
“This is fundamentally about fairness,” said a senior executive at a large private sector bank. “Insurance is about covering risk. The banks with weaker governance and higher failure rates should logically pay more. A flat structure rewards inefficiency and penalises prudence,” he added.
New India Cooperative Bank
The most recent case fuelling this concern is that of New India Cooperative Bank Ltd, which was placed under operational restrictions by the Reserve Bank of India (RBI) on February 13, 2025, due to concerns over its financial health.
To safeguard depositors, DICGC announced that eligible account holders would be reimbursed under Section 18A of the DICGC Act.
Depositors were asked to submit their claims by March 30, in order for the payments to be scheduled by May 14. Meanwhile, the RBI separately allowed partial withdrawals of up to Rs 25,000 per depositor, enabling over half the depositors to recover their full balances.
This is just the latest in a series of cooperative bank collapses that have tested the limits of India’s deposit insurance pool – largely funded by institutions that have never drawn from it.
A widening mismatch
As of March 31, 2024, India had 1,997 insured banks – including 95 commercial banks and 1,857 cooperative banks. All pay the same premium of 12 paise per Rs 100 of assessable deposits.
However, the entire Rs 1,432 crore in claims settled by the DICGC during FY24 was paid out to cooperative bank depositors.
This imbalance has persisted for years, raising questions about whether India’s current approach – where all banks, regardless of risk, pay the same – is sustainable.
According to CareEdge Ratings, this mismatch highlights the urgent need to explore a risk-based pricing model.
“Currently, the premium is flat. In the future, risk-based insurance premium pricing could be explored to ensure appropriate pricing for risk coverage,” the agency noted in a recent report.
Deposit insurance
Deposit insurance was introduced in India in 1962, and is administered by the DICGC, a wholly owned subsidiary of the RBI. It protects each depositor up to Rs 5 lakh per bank, covering savings, fixed, current, and recurring deposits.
The coverage limit, originally Rs 1,500, was last revised in 2020. Since then, insured deposits cover 97.8 percent of accounts, though by value, the coverage is only 43.1 percent – significantly lower than the 75.3 percent peak seen in FY97.
While NBFCs remain outside the insurance umbrella, the scheme includes all commercial banks, regional rural banks, local area banks, and eligible cooperative banks.
Reform vs revision: What’s more urgent?
There has been some public discussion on whether the Rs 5 lakh insurance limit should be raised. The CareEdge analysis examined several models:
• Inflation-linked update: Rs 6.2 lakh
• Per capita GDP-based parity: Rs 21 lakh
• Global average benchmark: Around Rs 5.2 lakh
However, the report argues that since India already covers nearly all small depositors by number, the case for raising the limit is less urgent than rethinking how premiums are charged.
Several developed countries have adopted risk-based pricing – a model where well-capitalised, well-governed banks pay lower premiums, and weaker institutions contribute more.
Such a system would also create incentives for better governance among cooperative banks and improve the long-term health of the deposit insurance fund.
Looking ahead
The case for reform is building. With the share of commercial banks in premium collections far outweighing their exposure to default, the pressure to rethink the model is mounting.
As the private sector banker put it, “You can’t have a few banks funding the security blanket for the entire system – especially when they’re not the ones pulling on it.”
