Risk-based premium for deposit insurance merits consideration: RBI Deputy Governor Swaminathan

Reserve Bank Deputy Governor Swaminathan J on Wednesday said implementation of risk-based premium for deposit insurance merits consideration as it will ensure that institutions with higher risk profiles contribute more to the insurance fund. Speaking at a conference in Jaipur, he also said that as the financial sector becomes more digitised, 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 financial institutions under their purview are adequately prepared to manage these risks, thereby safeguarding depositor confidence.

Swaminathan was addressing the International Conference of the International Association of Deposit Insurers- Asia Pacific Regional Committee (IADI-APRC) hosted by the Deposit Insurance Credit Guarantee Corporation (DICGC).

He further 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 incentivize banks to adopt stronger risk management practices.

"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," the deputy governor said.

He also emphasised that deposit insurers can further mitigate technology risks by relying on 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, Swaminathan added.

The senior RBI official also asked deposit insurers to prioritise crisis preparedness and develop comprehensive contingency plans that account for technology-induced disruptions.

This includes conducting regular stress tests and simulations to assess the potential impact of cyber incidents or fintech failures on financial institutions and the broader financial system, he said.

The evolving technological landscape presents both significant challenges and opportunities for deposit insurers.

By adopting a proactive, risk-based approach, including enhanced oversight, risk-based premiums, reliance on supervisory ratings, faster claim settlements, and industry collaboration, deposit insurers can effectively manage these risks, the deputy governor said.