Mumbai: reserve Bank of India has proposed Risk-Based Pricing For the bank deposit InsuranceThe argument is that troubled banks may face rapid deposit withdrawals Digital ChannelsBecause the quick dissemination of information through social media can increase the rush for banks.
“Implementation of risk-based premiums for deposit insurance should be considered. By linking the insurance premium to the level of risk posed by individual financial institutions, deposit insurers can encourage banks to adopt strong risk management practices,” RBI deputy governor Swaminathan J said, 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 competition among banks for deposits and credit growth is outpacing deposits. Swaminathan said, “The round-the-clock availability of online and mobile banking can increase vulnerabilities, which can lead to cash shortages and liquidity crises in banks during times of stress. In addition, the emergence of digital sources such as social media platforms has further aggravated this behavior.”
Currently, the Deposit Insurance and Credit Guarantee Corporation provides insurance cover of up to Rs 5 lakh per depositor, payable if the bank fails. There have been earlier recommendations that the RBI (through the DICGC) should shift to risk-based pricing. However, some bankers feared that labelling a bank as weak and raising deposit premium rates could have a self-fulfilling effect.
Swaminathan suggests 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 driven by a comprehensive understanding of each institution's risk profile,” he added.
“Implementation of risk-based premiums for deposit insurance should be considered. By linking the insurance premium to the level of risk posed by individual financial institutions, deposit insurers can encourage banks to adopt strong risk management practices,” RBI deputy governor Swaminathan J said, 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 competition among banks for deposits and credit growth is outpacing deposits. Swaminathan said, “The round-the-clock availability of online and mobile banking can increase vulnerabilities, which can lead to cash shortages and liquidity crises in banks during times of stress. In addition, the emergence of digital sources such as social media platforms has further aggravated this behavior.”
Currently, the Deposit Insurance and Credit Guarantee Corporation provides insurance cover of up to Rs 5 lakh per depositor, payable if the bank fails. There have been earlier recommendations that the RBI (through the DICGC) should shift to risk-based pricing. However, some bankers feared that labelling a bank as weak and raising deposit premium rates could have a self-fulfilling effect.
Swaminathan suggests 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 driven by a comprehensive understanding of each institution's risk profile,” he added.