What happens if my bank fails? All about Deposit insurance (DICGC)

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What if my bank goes bust and does not repay my deposit? We all know that the money has insurance of only up to one lakh. How does this work? Who will step in when a bank fails and how do we get back the money? In this age of small finance banks, knowledge about deposit insurance becomes crucial. In this post, let us learn more about deposit insurance and the deposit insurance and credit guarantee corporation.

Banking failures are a lot more common than we think! According to livemint (written after the PNB Nirav Modi scam), “Between 1935 and 1947, nearly 900 banks failed followed by 665 banks in the period from 1947 to nationalisation in 1969″. As always, regulation follows a scam. The Deposit Insurance and Credit Guarantee Corporation (DICGC) was established under the Credit Guarantee Corporation Act, 1961 on 15th July 1978 as a subsidiary of the RBI.

Savings bank accounts, current accounts, fixed deposits and recurring deposits are insured. The maximum insurance is Rs. One lakh per account (see below for variations).  Deposits from the following banks are insured:

  1. All commercial banks including the branches of foreign banks functioning in India
  2. Local Area Banks
  3. Regional Rural Banks
  4. Small Finance Banks
  5. Payment Banks
  6. All cooperative banks

What happens if my bank fails? All about Deposit insurance (DICGC)

A FAQ on deposit insurance

1. What is it? It is 2nd Oldest Deposit Insurance Scheme in the World.

2. Who is behind it? It is a wholly owned undertaking of RBI

3. What is Covered?

  • Account Balances,
  • Principal + Interest on Fixed Deposits/Recurring Deposits up to 100,000/-.

E.g. 1:-

Deposit of Rs. 100,000/- giving an interest of Rs. 7000/-,

Amount Insured: Rs. 100,000/- is insured( not 107,000).

E.g. 2:-

Deposit of Rs. 95000/- giving an interest of Rs. 5000/-

Amount Insured: Rs. 100,000/-

  • All accounts held in same capacity & same right are clubbed together

E.g.: -Savings A/c in the name of A+B, FD in the name of A+B, RD in the name of A+B

  • However, A+B & B+A are insured separately.
  • All the deposits in various branches of the same bank are clubbed together for insurance.
  • Accounts with B+C and B+A in the same bank are treated differently, and each would have insurance of Rs. One lakh. Here B is the first holder of both accounts.
  • Accounts B, B+C are treated differently and again would have one lakh insurance individually
  • Guardian of a minor account, company accounts are also treated differently from individual accounts and also individually eligible for the insurance of Rs. one lakh

4. What happens if the Bank goes bust? How does DICGC work?

In the case of bank failure, it goes either into:

  1. Liquidation or
  2. Merger/Amalgamation with another bank.

The liquidator of the bank prepares a depositor wise claim list and sends it to the DICGC for scrutiny and payment. The DICGC pays the money to the liquidator who is liable to pay to the depositors.

Your name will appear in this list only if your deposit is KYC Compliant. If you have accounts in small finance banks or co-operative banks, check if they maintain proper records of your KYC. (DICGC will need to know – to whom should the money be paid)

****Depositors do not have to make claims to DICGC****

In the case of amalgamation/merger of the bank:-

The amount due to each depositor is paid to the transferee bank. Transferee bank is the one with which the failed bank is merged with. The transferee bank gives credit to you.

5. What if DICGC does not have the money to pay the claims?

As of 31st March 2016, Deposit Insurance Fund had Rs.603 billion (add the interest earned on it). This amount is ten times the amount paid as claims since inception till 31st March 16.

Claims paid from inception till 31st March 2016 is Rs. 50 billion. Click here to see the list of Claims settled.

6. What if DICGC cannot pay the claims?

DICGC can borrow money from RBI. However, it has never been done to date.

7. Can the Claim Settlement be delayed?

It can be. If you want to know under what circumstances, the claim settlement may be delayed, have a look at the comments column in DICGC Claim Submission Pending page

8. Do I pay a premium to DICGC for deposit insurance?

No. Banks pay premium at 0.10% pa of the eligible deposits. Ask your bank if they have paid the premium to DICGC because if they don’t pay if for three consecutive periods- the insurance lapses J. (There are however no such lapse till date)

9. Which banks use DICGC Cover?

All banks compulsorily have to take the cover.

10. Should you invest in FDs of Small Finance Banks?

In principle yes, as they come under DICGC. However, there are other aspects to consider which we shall take in another article in the next few days.

Is there a Jugaad? You can always use account name permuation and combinations (A+B is different from B+A as mentioned above), provided you are aware of and adhere to income clubbing taxation rules.

Summary

Adequate deposit insurance regulations are available for different types of banks and bank accounts. However, this does not mean getting money back will be a cake walk. Depending on the circumstances it can take years (see link above). Just as justice delayed is justice denied, money denied is money lost (remember time is money). So just because there is deposit insurance in place does not make any bank, especially small finance and co-operative banks safe.

While there is a risk in any bank deposit, it is prudent to limit investments to Domestic Systematically Important Banks, ie D-SIB. The government is expected to support these banks in case of crisis as they are too big to fail. HDFC, ICICI and SBI are such banks as of now.

Note: This article was written in collaboration with a commissioned writer who is from the banking industy.

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of freefincal.com.  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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7 Comments

  1. What about below
    1. Stocks purchased are they safe not in terms of how company is doing and market price drops but from ndsl/cdsl where stocks are stored are they safe?

    2. And what abt mutual fund we purchased if mutual fund company like AMC companies goes bankrupt will we get all value back?

  2. Daer Sir.
    Kindly advice the credential of RBL bank in respect of your article ‘what happens if a bank fails.
    Although not as big as HDFC, SBI, RBL bank also gaining popularity at rapid rate and I have big FDs kept with the,

  3. I thought, if SBI (government owned) goes bust, they will return all my deposit money. is this true for government owned banks?

  4. When Merger or amalgamation between two banks happened the liquidator is not coming into the picture.They deal every thing between them selves.One bank is selling one is buying.There the insurance question does not arise.Therefore there is no loss for the depositor in a bank is it not. Further in the case of Global Bank take over by another bank what happened.kindly enlighten me and oblige.
    Natarajan

  5. Let’s say I have accounts in two different banks A and B. That means my 1 lakh is insured in each of them. Right Pattu Sir?
    The same is not true for branches of a bank A1 and A2 Or B1, B2 and B3. In such case A1+A2 Or B1+B2+B3 are covered for 1 lakh each. Please confirm if my understanding is correct.

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