This video is in Hindi and covers the following topics:

Bank failures in India: What will happen if your bank fails!
अगर आपका Bank ड़ूब गया तो क्या होगा?
Is 5 Lacs deposit Insurance enough?
Why 100% Deposits are not insured?
Deposit Insurance को कैसे बढ़ाएं?

The Silicon Bank Valley (SVB) crisis offers many lessons to governments and central banks elsewhere

The crisis, essentially an outcome of failure of investment-risk assessment and asset liability mismatch

Under the US deposit insurance rules, every insured depositor will get up to a ceiling of $ 250000 but in the case of SVB collapse, the authorities have said that all depositors will get their money back

In India, just as the FDIC does in the US, the Reserve Bank of India’s subsidiary, Deposit Insurance and Credit Guarantee Corporation (DICGC) manages a deposit insurance programme that covers deposits in the case of bank failures

The DICGC insures all deposits such as savings, fixed, current, and recurring deposits.

This maximum insured amount is Rs 5 lakh per bank account, including principal and interest.

But is the Rs 5 lakhs limit adequate?

To be sure, unlike in US there haven’t been big bank failures in India in recent years

A few cases where banks plunged into financial weakness (Yes Bank, LVB, PMC) were dealt swiftly by takeovers or bailouts by stronger banks

Of course, there have been several bank closures among cooperative banks though (According to the latest available information, which is as of September 2021, a total of 382 cooperative banks in India have failed and were liquidated or merged with other banks since 1969)

One unintended consequence of banking failures in US will be that depositors will tend to move away their money from smaller banks to bigger banks.

This is because of a widening trust deficit. In India too smaller banks may face a tough time ahead.

The deposit insurance guarantee scheme was set up in 1961 to ensure depositors are assured of at least some amount in return in the event of a bank collapse

The DICGC is a subsidiary of the Reserve Bank of India (RBI), which also provides financial support to the corporation if needed.

In case of a bank failure, the DICGC is required to pay the insured deposit amount to each depositor up to a maximum of Rs. 5 lakh per depositor per bank.

This amount was enhanced to Rs 1 lakh only in 1993 from Rs 30,000

A further increase to Rs 5 lakh happened in 2021.

According to the government, with the last year amendment in the DICGC Bill, the deposit insurance coverage in India has gone up to 98.3 percent and covered deposit value has risen to 50.9 percent (29% Earlier) against the comparative numbers globally — 80 percent and 20-30 percent, respectively.

The Deposit Insurance and Credit Guarantee Corporation (DICGC) in India earns money primarily through the collection of insurance premiums from banks that are insured by it.

Under the Deposit Insurance Scheme, all commercial banks, local area banks, regional rural banks, and cooperative banks are required to pay a premium to the DICGC for insuring their deposits.

The premium is calculated as a percentage of the bank’s deposits and is paid on an annual basis. The total collection of premium from insured banks was 19,490 crore during the year 2021-22

Apart from premium collection, the DICGC also earns income from the investment of its funds. The corporation invests its funds in various financial instruments such as government securities, bonds, and other approved securities.

The income generated from these investments is used to cover the claims of depositors in case of bank failures.

There is a general agreement that the cover needs to go up

Often, depositors will have to wait for a long period to get their money back in such cases. But now, even if a bank is placed under moratorium, the customers can get their money back in 90 days

Overall, the claims settled under these three channels amounted to 8,517 crore, which is a commendable achievement when seen in comparison with the total of claims of 5,763 crore settled since the establishment of the DICGC up to 2020-21

This will help smaller banks to regain some lost trust. But, here again, the comfort is only for smaller depositors.

The rising trust deficit in the banking system can be addressed only if all depositors get insurance cover equivalent to the money they parked in banks

In the absence of an adequate guarantee, depositors may move to bigger banks or look for alternative instruments to park their savings.

Government banks offer some comfort. But the larger point is unless all categories of bank depositors are assured about the safety of the money, there is a possibility of people moving money out of the bank and to other safer instruments. The government shouldn’t let that happen….(read more)

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Bank failures in India: What will happen if your bank fails!

India has witnessed several bank failures over the years, leading to considerable panic and anxiety among depositors. While measures have been taken to improve the stability and security of the banking sector, it is always essential for individuals to understand the potential consequences and be well-prepared in the unfortunate event of a bank failure.

Bank failures occur when a bank is unable to meet its financial obligations and becomes insolvent. This can happen due to various reasons such as poor governance, mismanagement, inadequate capital, fraud, or an economic downturn. When a bank fails, it can have far-reaching effects on the economy and can be devastating for depositors and borrowers.

So, what will happen if your bank fails? Let’s delve deeper into the implications:

1. Deposit protection: The first and foremost concern for depositors is the safety of their funds. The Reserve Bank of India (RBI), the country’s central banking institution, has put in place the Deposit Insurance and Credit Guarantee Corporation (DICGC) to ensure deposit protection in case of a bank failure. DICGC provides insurance coverage of up to Rs. 5 lakh per depositor, including both principal and interest amount, across all accounts held with the failed bank. However, it is important to note that this coverage limit is per depositor and not per account, so if an individual holds multiple accounts in the same bank, the coverage will still be limited to Rs. 5 lakh.

2. Moratorium and restrictions: During a bank failure, the RBI may impose a moratorium, which is a temporary suspension of specific banking activities. This means that depositors might not be able to withdraw or access their funds for a certain period, until the situation is resolved. Additionally, the RBI may place restrictions on the withdrawal limit, allowing only a limited amount to be withdrawn during a specific period. These measures are taken to prevent a sudden rush of withdrawals, which could worsen the financial condition of the bank.

3. Merger or acquisition: In the case of a bank failure, the RBI may choose to merge the failed bank with another bank or facilitate its acquisition by a healthier bank. This is done to ensure the continuity of banking services and to minimize disruptions. Depositors’ accounts and loan obligations are transferred to the acquiring bank, and they become customers of the new entity. The RBI takes necessary measures to protect depositors’ interests and minimize any potential financial loss.

4. Recovery of funds: In certain cases, depositors may face delays in recovering their funds, especially if the failed bank has limited assets or is involved in legal proceedings. However, under the DICGC scheme, depositors are eligible to receive their insured amount within a specified timeline, once the bank failure is confirmed. It is important for depositors to keep their records of deposits and transactions to facilitate the recovery process.

5. Credit implications: A bank failure can have broader implications on the credit and lending ecosystem. Borrowers may face challenges in servicing their loans or obtaining new credit facilities during this period. It is crucial for borrowers to stay in communication with the concerned authorities and understand the revised repayment terms, if any, after a banking crisis.

In conclusion, while bank failures can be unnerving, it is vital for individuals to stay informed and prepared. The DICGC provides deposit insurance coverage up to Rs. 5 lakh per depositor, and the RBI takes necessary actions to protect the interests of depositors. It is advisable for individuals to diversify their holdings across multiple banks and maintain sufficient records to expedite the recovery process, if unfortunate circumstances arise. Additionally, staying updated with the latest financial news and being aware of the overall health of the banks where one holds accounts can contribute to better financial resilience in the face of potential bank failures.