What is Bank failure?
A bank failure occurs when a bank is unable to meet its obligations to depositors and other creditors due to financial insolvency. This typically happens when a bank’s assets (such as loans and investments) lose value or become illiquid, meaning they cannot be easily converted into cash to cover the bank’s liabilities, including customer deposits.
When a bank fails, it can have significant consequences for depositors, shareholders, and the broader economy. Depositors may lose access to their funds temporarily, and in extreme cases, they may lose some or all of their deposits if the bank is unable to recover. Governments and regulatory agencies often step in to manage bank failures, either by facilitating mergers or acquisitions with healthier banks, providing financial assistance, or, in the worst-case scenario, closing the bank and liquidating its assets to repay creditors.
Example, Let’s imagine a fictional bank called “SafeSavings Bank.”
Imagine you’re someone who saves money by depositing it into SafeSavings Bank. You’ve been doing this for years, trusting that your money is safe and that you can withdraw it whenever you need it.
Now, let’s say SafeSavings Bank made some risky loans to people who couldn’t pay them back. They also invested in some businesses that ended up failing. Because of these bad decisions, SafeSavings Bank lost a lot of money.
As more people hear about these losses, they start to worry about the safety of their money in SafeSavings Bank. They rush to the bank to withdraw their savings all at once. But because the bank doesn’t have enough cash on hand to give everyone their money back, it’s forced to close its doors.
Now, you and many others who trusted SafeSavings Bank are in trouble. You might not be able to access your savings right away, and there’s a chance you might not get all of it back. This situation is a bank failure, where the bank can’t fulfill its promise to return your money when you need it because it’s run into financial trouble.
How much money is insured when bank fail?
Your money in bank is insured by Deposit insured and credit guarantee corporation (DICGC).
What does the DICGC insure?
- The DICGC insures all deposits such as savings, fixed, current, recurring, etc. deposits except the following types of deposits
- Deposits of foreign Governments;
- Deposits of Central/State Governments;
- Inter-bank deposits;
- Deposits of the State Land Development Banks with the State co-operative bank;
- Any amount due on account of and deposit received outside India
- Any amount, which has been specifically exempted by the corporation with the previous approval of Reserve Bank of India.
What is the maximum deposit amount insured by the DICGC?
Each depositor in a bank is insured upto a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest amount held by him in the same right and same capacity as on the date of liquidation/cancellation of bank’s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.
| Savings A/C | Current A/C | Fixed Deposit | Total Deposit | Deposit Insured upto | |
| Mr. Ramesh Mestri (Individual) | 4,50,000 | 25,000 | 35,000 | 5,10,000 | 5,00,000 |
| Mr. Ramesh Mestri (Partner ABC & Co.) | 4,80,000 | 1,00,000 | 5,80,000 | 5,00,000 | |
| Mr. Ramesh Mestri (Guardian of Mr. Suresh) | 95,000 | 3,50,000 | 4,45,000 | 4,45,000 | |
| Mr. Ramesh Mestri (Director of R.M. Works Ltd ) | 5,50,000 | 15,50,000 | 21,00,000 | 5,00,000 |
However, if individuals open more than one joint accounts in which their names are not in the same order for example, A, B and C; C, B and A; C, A and B; A, C and B; or group of persons are different say A, B and C and A, B and D etc. then, the deposits held in these joint accounts are considered as held in the different capacity and different right. Accordingly, insurance cover will be available separately upto rupees five lakhs to every such joint account where the names appearing in different order or names are different.