MUMBAI: Risk-based premium increases for deposit insurers can ensure that institutions with higher risk profiles contribute more to the insurance fund, Reserve Bank Deputy Governor Swaminathan Janakiraman has said.
He also said that as the financial sector becomes increasingly digitized, deposit insurers must work closely with regulators and supervisors to strengthen oversight mechanisms. This involves regularly updating regulatory frameworks to address 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 well-prepared to manage these risks, thereby safeguarding depositor confidence," Swaminathan said on the second day of the International Association of Deposit Insurers' Asia-Pacific regional committee conference, hosted by the Deposit Insurance and Credit Guarantee Corporation in Jaipur on Wednesday.
Suggesting a risk-based premium mechanism for deposit insurance, he noted, "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 added.
He further suggested that deposit insurers could mitigate technology risks by relying on supervisory rating assessments that evaluate 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 commercial-banker-turned-central-banker further 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.
The evolving technological landscape presents both significant challenges and opportunities for deposit insurers. By adopting a proactive, risk-based approach—which includes enhanced oversight, risk-based premiums, reliance on supervisory ratings, faster claim settlements, and industry collaboration—deposit insurers can effectively manage these risks, he said.