RBI Moves Away From Bank Deposit Ratings, Rating Agencies Seek Clarity

The direction, issued around ten days ago, comes after rules introduced by the Securities and Exchange Board of India in February 2026 required rating agencies to clearly identify the financial sector regulator overseeing the instrument being rated. The development has left rating firms seeking clarification on how the two regulatory positions should be reconciled.

Why the RBI’s direction matters for bank deposits

The issue centres on the way credit rating agencies communicate ratings for bank deposits. Under the newer disclosure requirement, rating agencies are expected to name the regulator of the specific financial instrument in their press releases and rating action reports.

If the RBI cannot be identified as the regulator of bank deposits, rating agencies could face difficulty complying with that requirement while continuing to publish ratings on deposits. The RBI has not, however, explicitly instructed agencies to stop rating deposits.

The reasons behind the central bank’s direction have not been publicly spelt out. Rating agencies have approached SEBI seeking guidance on how they should proceed.

The development is also notable because it is reportedly the first time the RBI has issued such a direction in relation to ratings of bank deposits.

Could deposit ratings create a risk of sudden withdrawals?

One possible concern is the impact a sharp downgrade could have on depositors. A bank deposit rating typically considers factors such as capital adequacy, asset quality, management strength, earnings, liquidity and sensitivity to interest rate and foreign exchange movements.

A deterioration in one or more of these areas could result in a downgrade. If a large number of depositors respond by withdrawing funds after a rating change, the resulting pressure could affect the bank’s liquidity and potentially create wider stability concerns.

The risk may be greater for smaller banks and cooperative institutions, which may have less capacity to absorb a sudden withdrawal of deposits. A downgrade following weaker asset quality, falling capital levels or the departure of senior management after financial irregularities could therefore have consequences beyond the rating itself.

Who actually uses bank deposit ratings?

For most retail depositors, ratings are unlikely to be a major factor when deciding where to keep their savings. Many individual customers tend to rely on the reputation and perceived stability of a bank rather than comparing formal deposit ratings.

The situation is different for large institutional depositors. Public sector organisations, government-linked entities and companies often have internal policies governing where surplus funds can be placed, with some requiring deposits to be held only with banks above a specified rating threshold.

This means a downgrade can influence institutional decisions even if individual depositors remain largely unaffected.

A bank deposit rating is essentially an assessment of relative risk and should not be confused with an investment recommendation. The distinction is important because deposits are subject to a separate protection framework.

Deposit insurance remains a separate safeguard

Bank deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which currently covers up to ₹5 lakh per depositor per bank, including principal and interest.

A proposal to increase the insurance limit to ₹7.5 lakh is awaiting approval. The deposit insurance mechanism is separate from credit ratings and provides a defined level of protection to eligible depositors in the event of a bank failure.

The regulatory question surrounding bank deposit ratings therefore does not change the existing deposit insurance framework. It instead concerns how the risk associated with deposits is assessed and communicated by rating agencies.

Ratings will continue for other bank-linked instruments

The uncertainty is specific to bank deposits and does not mean that credit rating agencies will stop assessing other financial instruments connected with banks.

Agencies can continue rating products such as bank loans, certificates of deposit, Additional Tier-I bonds and subordinated debt instruments, including Tier-II bonds.

The immediate question is how rating agencies will handle bank deposits while meeting the disclosure requirements introduced earlier this year. Until regulatory clarity emerges, the industry faces a potentially significant change in how bank deposit ratings are issued and presented.

For now, rating firms are awaiting guidance on the way forward. The RBI’s position has also raised a broader question about whether formal ratings of bank deposits could unintentionally influence depositor behaviour during periods of financial stress.