The sudden collapse of a bank can be a distressing event for depositors, especially in a country like India, where millions of people entrust their savings to various banks. The banking system in India is generally considered stable, but like in any country, no institution is entirely immune to financial instability. In case a bank faces a crisis, depositors must understand how their savings accounts and fixed deposits (FDs) will be affected. Here’s a guide to what happens if your bank collapses in India and the rules governing deposits in both big and small banks.
Deposit insurance coverage
In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI), provides insurance cover to all depositors in case a bank fails. The insurance covers savings accounts, fixed deposits, recurring deposits, and current accounts, but with a cap.
Key points to know:
- Each depositor is insured up to ₹5 lakh per bank. This limit applies to the total amount held by a depositor across all accounts in a single bank.
- If you have multiple accounts (like a savings account and FD) in the same bank, the total insurance cover is still capped at ₹5 lakh.
- The ₹5 lakh includes both principal and interest. If your total balance exceeds ₹5 lakh, only ₹5 lakh will be refunded in case of the bank’s collapse, and the remaining amount will depend on the liquidation process.
Big Banks vs. Small Banks
While the rules for deposit insurance are the same across the banking system, the stability of the bank can affect how quickly depositors can access their funds.
In the case of big banks:
- Public sector banks (PSBs), like State Bank of India (SBI), Bank of Baroda (BoB), and others are considered relatively safe due to their government backing.
- Private sector banks such as HDFC Bank, ICICI Bank, and Axis Bank are regulated under strict guidelines by the RBI and are generally stable.
- In the rare event that a large private bank collapses, the RBI and the Indian government have historically stepped in to manage the crisis, either by arranging a bailout or by facilitating a merger with a stable bank. For example, when Yes Bank faced a crisis in 2020, the RBI imposed a moratorium, ensuring depositors' funds were protected within the DICGC limit.
In case of small banks:
- Smaller banks, especially new-generation private banks or regional rural banks (RRBs), might not enjoy the same level of perceived safety as larger banks. However, they are still governed by the same deposit insurance rules.
- If a small bank collapses, the liquidation process may take longer, and in some cases, depositors may face challenges accessing their funds promptly, even though the ₹5 lakh insurance cover is available.
- In extreme cases, the DICGC will initiate the process of liquidation or restructuring, and the funds up to ₹5 lakh will be returned to depositors, subject to the liquidation proceedings.
What Happens During a Bank Failure?
In the event of a bank collapse, the following steps generally occur:
- Moratorium: If a bank faces a liquidity crisis, the RBI may impose a temporary moratorium to prevent a run on the bank. This means depositors cannot withdraw large sums of money for a certain period.
- Resolution or Merger: If the RBI deems the bank unsalvageable, it might facilitate a merger with another stable bank. Depositors in the failing bank will have their accounts transferred to the new bank, and their funds will be protected as per the insurance limit.
- Liquidation: If no merger is possible, the bank will go through liquidation, where the DICGC ensures that depositors receive up to ₹5 lakh of their insured deposits. The process may take several months to years, depending on the complexity of the bank’s assets and liabilities.
Fixed Deposits (FDs) in a Bank Collapse
For fixed deposits (FDs), the same Rs 5 lakh insurance limit applies. However, FDs are generally safer as the bank is contractually bound to return the principal and interest at maturity, unless it collapses.
- Before maturity: If the bank fails before your FD matures, the DICGC will cover up to Rs 5 lakh, including principal and interest. If the FD amount exceeds ₹5 lakh, the remaining balance will depend on the liquidation process.
- After maturity: If the bank has collapsed after your FD matured, the amount due to you will be processed along with other claims during the liquidation. However, interest payments beyond Rs 5 lakh will be subject to liquidation.
Steps to Protect Your Deposits
While India’s banking system is largely secure, depositors should take a few steps to safeguard their savings:
- Diversify Deposits: To ensure that all your deposits are covered, consider spreading your money across multiple banks. This way, each account in a different bank will have a ₹5 lakh insurance cover.
- Monitor Bank Health: Keep an eye on your bank’s financial health. Although this may not guarantee safety, keeping abreast of news related to the bank’s financial stability can help.
- Consider Government-Backed Instruments: If you're unsure about a bank's safety, consider investing in government-backed instruments such as post office savings, government bonds, or public sector bank FDs, which are perceived to have a lower risk.
In the unlikely event that a bank collapses in India, depositors are protected up to ₹5 lakh by the DICGC. While big banks generally pose a lower risk due to government backing, small banks also adhere to the same deposit protection rules. However, in both cases, depositors should be aware of the liquidation process and how it might impact access to funds. Diversification and monitoring the health of your bank are key strategies for safeguarding your money in any economic scenario.
