ICRA Warning: Risk of Profit Dip for Banks Amid Proposed Deposit Insurance Changes

ICRA, a rating agency, stated on March 5, 2025, that raising the deposit insurance limit could reduce banks’ net profits by up to ₹12,000 crore annually. This would result in a potential dip of up to 4 basis points (bps) in the return on assets (RoA) and up to 40 bps in the return on equity (RoE).

Furthermore, if the insurance premium is increased, the overall impact on RoA and RoE could reach up to 7 bps and 68 bps, respectively, according to ICRA’s statement.

Potential Changes in Insured Deposit Ratio (IDR)

Although the specifics of the proposed increase in the deposit insurance limit remain unclear, the insured deposit ratio (IDR) could rise to between 47.0% and 66.5% under different scenarios. The IDR, which is the ratio of insured deposits to assessable deposits, stood at 43.1% as of March 31, 2024, compared to 44.4% on March 31, 2023.

In February 2020, the Deposit Insurance and Credit Guarantee Corporation (DICGC) increased the deposit insurance limit from ₹1 lakh to ₹5 lakh per depositor per institution. This topic has gained attention following the recent failure of a cooperative bank. Additionally, there is a possibility that the insurance premium could rise to ₹0.15 per ₹100 deposit (from the current ₹0.12), subject to approval from the Reserve Bank of India (RBI), to strengthen the DICGC’s Deposit Insurance Fund (DIF).

As of March 31, 2024, 97.8% of the total eligible/assessable accounts were fully covered, with the remaining 2.2% partially covered up to the ₹5 lakh coverage limit, the rating agency added.

Conclusion

The potential changes in the deposit insurance limit and premium could significantly affect banks’ profitability, with a moderate impact on their financial metrics. While the proposed adjustments aim to strengthen the Deposit Insurance Fund, their effect on the banking sector’s financial health should be closely monitored, especially considering the balance between providing enhanced deposit protection and maintaining banks’ profitability.

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