the reserve bank of india has said that the deposit insurance and credit guarantee corporation dicgc can soon charge a riskbased premium for all financial institutions to enjoy insurance cover under the scheme what this means is that once this comes into effect banks with strong risk profiles offering better risk adjusted returns on deposits like fixed deposits and savings accounts as compared to weaker banks although flat rate premium systems have the advantage of being relatively easy to understand and administer they do not take into account the level of risk that a bank poses to the deposit insurance system and can be perceived as unfair in that the same premium rate is charged to all banks regardless of their risk profile the reserve bank of india rbi stated in its latest annual report why this was neededthe deposit insurance cover for bank depositors was raised from rs 1 lakh to rs 5 lakh in case the bank fails and this became effective from february 4 2020 however this cover is not free for financial institutions like banks as they have to pay insurance premium to dicgc to enjoy this insurance cover based on the risk profile of the financial institution dicgc collects premium either at a flat rate or a differentiated rate the primary objective of a differential premium system is to provide incentives for banks to avoid excessive risk taking and introduce more fairness into premium assessment processes the introduction of rbp in order to address the issue of moral hazard inherent in flat rate premium is a natural corollary the internal committee on rbp chairman shri v g venkata chalapathy undertook the risk assessment of banks primarily based on camel parameters and recommended the introduction of rbp says the rbi report the recent recommendations made by the internal committee under chairmanship of shri v g venkata chalapathy are currently being considered by the rbi for their implementationseveral committees in past had also recommended rbp however it could not be operationalised because the roll out of the process was linked with hike in deposit insurance cover though the insurance was raised to accommodate the rise in cover from rs 1 lakh to rs 5 lakh however the increase in the premium rate was marginal as it was increased to 12 paise per rs 100 of deposits from april 1 2020 from 10 paise earlier what it means for deposit holdersto implement the rbp the premium may go up further however risky financial institutions will have to pay much higher premium for the cover while the strong ones will be rewarded for their prudence and pay a lower premium as mentioned above the banks with strong risk profile will offer much better risk adjusted return to their depositors compared to those with weaker risk profile once this is implemented so even if you are getting a similar interest rate on your deposit in a strong bank and a weak bank it would be much better to go with