In a key announcement today, the Reserve Bank of India’s Monetary Policy Committee (MPC) unveiled a series of measures aimed at strengthening the resilience and competitiveness of the country’s banking sector, with the introduction of a risk-based deposit insurance premium taking centre stage.
The central bank also chose to keep the policy repo rate on hold, emphasising stability in the current macroeconomic environment.
Risk-Based Deposit Insurance Premiums: A Major Reform
Under the new framework, the Deposit Insurance and Credit Guarantee Corporation (DICGC) will move away from the flat-rate premium system of 12 paise per Rs 100 of assessable deposits.
Instead, banks will be charged premiums based on their risk profiles, rewarding better-rated institutions with lower premiums. This initiative is expected to encourage stronger risk management practices and is set to take effect from the next financial year. Analysts said this move signals the RBI’s focus on incentivising sound banking practices while enhancing sector stability.
Repo Rate Held Steady
Alongside this major reform, the MPC decided to maintain the policy repo rate at 5.50 per cent. The Standing Deposit Facility (SDF) remains at 5.25 per cent, while the Marginal Standing Facility (MSF) rate and Bank Rate continue at 5.75 per cent. The committee also reaffirmed a neutral policy stance, reflecting its cautious optimism in balancing growth support with inflation control.
Other Measures to Strengthen Banks
Expected Credit Loss Framework: The RBI plans to introduce the Expected Credit Loss (ECL) framework for all Scheduled Commercial Banks (excluding SFBs, Payment Banks, and RRBs) and All India Financial Institutions, replacing the existing incurred loss model. A glide path until 31 March 2031 will allow for a smooth transition, enhancing credit risk management and comparability of financial statements.
Basel III Capital Norms: Revised Basel III guidelines will be implemented from 1 April 2027, with a draft on the Standardised Approach for Credit Risk expected soon. Lower capital requirements for sectors such as MSMEs and residential real estate are designed to boost bank resilience.
Prudential Guidelines for Investments: Finalised guidelines on Forms of Business and Prudential Regulation for Investments remove restrictions on overlapping activities between banks and group entities, giving boards greater operational freedom.
Capital Market Lending: Draft updates will expand banks’ ability to finance acquisitions, increase lending limits against shares, REITs, and InvIT units, and adopt a principle-based approach for lending to capital market intermediaries.
By introducing risk-based deposit insurance premiums and maintaining interest rates, the RBI aims to create a more competitive and resilient banking sector. Experts say these steps provide stability for borrowers, promote efficient credit allocation, and incentivise better risk management, strengthening the overall financial system.
