Risk Free Banking is a Hoax!

Risk Free Banking is a Hoax

It is certainly essential for the citizens of a nation to have trust on their financial mechanisms but it is equally important to be aware of all risks that the individuals are exposed to in terms of their financial banking experiences.

Mainly due to the lack of credible information and financial illiteracy, a lot of people assume that depositing cash in the banks is a fool proof way of investment. However, it is essential to know that not only banks can fail as well but they will also take your money down with them when they shut shops.

In order to safeguard the finances of the common man in the banking systems, there are multiple regulations that are in place. Following are the actions that have been taken in the past to rescue banks that have failed and the depositors associated with them :-

  1. Depositor Insurance and Credit Guarantee Corporation has insured up to ₹ 5 Lakh of money which is deposited for an individual in one bank. Most of the big banks are covered by DICGC.
  1. The RBI takes over the board of those banks that the central government body estimates is struggling to keep up with its finances. If any such banking institution is facing troubles to maintain stability and is constantly booking losses, the RBI ensures that they step in at the right time and either takeover the operations of the bank or reconstruct the same. The biggest assurance for the Indian Banking sector is that the central authority of RBI has not let any big bank sink yet.
  1. The Banks that are running a risk of shutting down are usually supported by investors and other parties that allows them to stay afloat in the sector and manage their financial books in a better manner.

All of these safeguards are in place but it is essential to know that risk free banking is a hoax and all financial institutions stand a risk of shutting down or failing.  To be well aware of the risks and rewards that are associated with banking, it is important to be updated with the news. However, there are certain technical terms that have been a part of the recent news but are not understood by all. This directory gives a brief insight into such terms and meanings. Have a look!

  1. Moratorium

A moratorium is a phase in which a complete freeze is placed on most of the activities of a bank. In India, Banking Regulation Act, 1949 exists and a provision of that Act in Section 45, grants the power to the RBI to place a moratorium for up to six months—this can also be extended. The agenda of bringing such provisions in place is to identify solutions and prevent further degradation of the bank.

  1. ECS

ECS is the abbreviation for Electronic Clearing Service. This is the digital mode of transferring the funds from one bank account to another.

  1. Debit Mandates

A bank mandate or debit mandate is a legal right in terms of authorisation that one gives to a third party to collect the required fixed amount from their bank account at regular intervals.