The Reserve Bank of India has instructed rating agencies to refrain from categorizing it as the regulator overseeing bank deposits. According to reports from The Economic Times, this directive was issued approximately ten days ago to the credit rating industry. The central bank told rating agencies to refrain from mentioning RBI as the regulator of the rated instrument in their communiques on ratings of bank deposits. This marks the first time RBI has issued such a directive, with the triggering factors remaining unclear as RBI has not spelled out the specific reasons for this action. As per Mint, the development could create a regulatory dilemma for rating agencies because of disclosure requirements introduced by SEBI earlier this year.
The directive stems from Securities & Exchange Board of India (SEBI) rules requiring rating firms to explicitly identify and disclose the financial sector regulator of the specific rated instrument in their press releases and rating action reports. As reported by The Economic Times, these rules were introduced in February 2026. Under the circumstances, if RBI cannot be named as the regulator for bank deposits, then the central bank directive could force credit rating companies to stop putting out ratings on bank deposits entirely. The issue creates uncertainty because if rating agencies are required by SEBI to identify the regulator of the instrument but RBI does not want to be identified as the regulator for bank deposit ratings, CRAs may have difficulty complying with both requirements. A source told The Economic Times that "RBI is not saying it doesn't regulate bank deposits, but the directive is a hint that RBI probably doesn't want bank deposits to be rated."
The rating companies have approached SEBI for guidance regarding this development. According to regulatory circles reported by The Economic Times, the RBI direction may stem from concerns over a possible flight of deposits and the resulting instability following a sudden ratings downgrade of a bank. A senior banker explained that "a drop in capital or surge in NPA, or CEO's exit post financial irregularities can cause downgrade. If this drives depositors to pull out money, it can unsettle a bank. While this has happened with some private sector banks, cooperative and smaller banks may be more vulnerable." Parameters like capital adequacy, asset quality, management strength, earnings performance, liquidity position and sensitivity to movements in interest and foreign exchange rates go into finalising the rating of a bank's deposits. As per Mint, the immediate issue is not a change in the safety cover available to depositors, but whether depositors and institutional depositors could lose one independent source of information used to compare the credit risk of different banks.
The Deposit Insurance and Credit Guarantee Corporation (DICGC) guarantees bank deposits up to ₹5 lakh per depositor per bank for combined principal and interest. As reported by The Economic Times, the proposal to raise the limit to ₹7.5 lakh is awaiting approval. Rating firms would continue to rate other instruments linked to banks, such as loans, certificate of deposits, additional tier-I bonds, and subordinated debt instruments like tier-2 bonds. A regulatory official noted that "the protector of deposits is DICGC which is technically an independent corporation," suggesting that RBI may not want depositor decisions to be influenced by the fact that deposits are under RBI regulation. Eligible bank deposits are insured by the DICGC up to ₹5 lakh per depositor per bank, covering principal and interest subject to the applicable rules.
A source told The Economic Times that RBI is not saying it doesn't regulate bank deposits, but the directive is a hint that RBI probably doesn't want bank deposits to be rated. Retail depositors are unconcerned about ratings and rarely differentiate among state-owned banks, but PSUs, state-run organisations, and many corporates check ratings before depositing surplus funds. Internal guidelines require many PSUs to place deposits with banks above a certain rating, and rating of deposits is guidance based on ordinal assessment of risks rather than investment instruction. The rule to identify the regulator in rating releases is meant to clarify which authority oversees the underlying instrument, helping investors and market participants know which regulatory framework and redressal mechanism apply to an instrument. For now, the next step is likely to depend on the guidance sought by rating agencies from SEBI and any further clarification from RBI. Until then, bank deposit ratings remain an area of regulatory uncertainty rather than a discontinued product.
