Retail depositors are increasingly turning to cooperative banks as lower deposit rates at scheduled commercial banks push savers to seek better returns. For the fortnight ended September 19, 2025, term deposits with cooperative banks rose by Rs 2,866 crore or 0.7% to Rs 4.47 lakh crore, up from Rs 4.44 lakh crore on September 5. In contrast, term deposits across all scheduled commercial banks, including public, private, regional rural, small finance, and payment banks, fell by Rs 78,888 crore or 0.4% to Rs 206 lakh crore. Overall deposit growth for scheduled banks, including cooperative banks, dipped by 0.5% to Rs 240.4 lakh crore from Rs 241.6 lakh crore.
On a year-on-year basis, cooperative banks posted a robust 10.34% growth in deposits, outpacing the 9.50% rise seen across scheduled banks. However, credit growth remained subdued for cooperative banks at 6.83%, compared to 10.3% for scheduled banks, indicating that borrowers continue to prefer other lending channels.
What did Venkatakrishnan Srinivasan say?
“The increase in term deposits with cooperative banks seems to reflect a combination of proximity, convenience and marginally better returns,” says Venkatakrishnan Srinivasan, Founder and Managing Partner at Rockfort Fincap LLP, who further adds, “The higher rates attract retail depositors, especially senior citizens and savers seeking slightly higher income from their idle funds.” For many, especially senior citizens, interest rates are the major source of their income.
While public and private banks typically offer one-year deposit rates between 6.25% and 6.65%, and small finance banks around 7%, many cooperative banks continue to offer rates up to 7.5%. This marginal yield advantage is prompting depositors, especially senior citizens, to shift or open new fixed deposit accounts with cooperative banks.
“Small savings schemes, though offering attractive returns between 6.9% and 8.2%, often come with long-term lock-ins and limited liquidity. As against bank fixed deposits with scheduled or cooperative banks allow premature withdrawals, offering depositors greater flexibility,” adds Srinivasan.
RBI to unveil new guidelines?
Analysts note that retail investors often prefer local cooperative banks due to familiarity and accessibility, sometimes prioritising personal relationships over credit quality. There’s also a perception that in times of stress, regulators or the government would intervene to protect small depositors, though such assumptions may not always hold. With the coverage limit for deposit insurance at Rs 5 lakh per depositor per bank, and the flat premium continuing to be borne by banks, it ensures that customer protection remains intact and free of cost.
However, the advantage is set to change with the RBI proposing a major shift in how banks pay for deposit insurance, moving from a flat-rate model to a risk-based premium framework, effective from the next financial year (FY27), making cooperative banks bear a higher premium burden under the new framework. The RBI is expected to release detailed guidelines outlining the risk parameters and implementation mechanisms for the new framework.
Currently, all banks pay a flat premium of 12 paise for every Rs 100 of deposits, a rate unchanged since April 1, 2020, to the Deposit Insurance and Credit Guarantee Corporation (DICGC), regardless of their financial health. Under the new proposal, banks will be charged premiums based on their individual risk profiles, meaning stronger, well-capitalised institutions could pay less, while weaker or riskier banks may continue to pay at the ceiling rate.
This move is designed to incentivise better governance and risk management across the banking sector. By linking insurance costs to financial soundness, the RBI aims to encourage banks to maintain robust capital buffers and prudent lending practices. The proposal also aligns India’s deposit insurance regime with global standards, where risk-based premium models are widely adopted to ensure fairness and sustainability.
A senior banker stated that the shift will have broader implications for competitive dynamics in the sector. Larger, financially sound banks may benefit from reduced premiums, potentially allowing them to offer more attractive deposit rates. Smaller or stressed institutions may face higher costs, prompting a reassessment of their risk strategies.
In FY 2024–25, no claims were made by commercial banks. The DICGC settled claims worth Rs 476 crore for insured depositors of liquidated and merged banks, down from Rs 1,437 crore in FY 2023–24. As of March 2025, of the 1,982 insured banks, 1,843 are cooperative banks. Of the total 29,366 lakh crore deposit accounts, 28,650 lakh crore accounts are fully protected, representing a coverage ratio of 97.6%.
For FY25, of the total assessable deposits of Rs 240 lakh crore (Rs 218 lakh crore in March 2024), cooperative banks account for Rs 12 lakh crore (Rs 11.8 lakh crore in March 2024). As of March 2025, the Deposit Insurance Fund stood at Rs 2.28 lakh crore, with cumulative premium receipts of Rs 26,764 crore. The insured deposit ratio across the system is 41.5%.