Bank Failure: What Happens When a Bank Fails

What Happens When a Bank Fails

Banks are one of the most trusted institutions to keep your earnings and savings safe. Sadly, that’s not the case always; sometimes banks fail and fail big time. You can never predict if a bank is at risk of failing or shutting down, but you can take precautions to keep your money safe in case of a systemic bank failure.

What is a Systemic Bank Failure?

A systemic bank failure is when a bank is unable to meet its obligations or fulfill depositors’ requests for cash. This could be due to various reasons; a bank losing capital on its investments, being exposed to major risks, non-performing assets, operating on faulty business models, or it can be an unforeseen event like the COVID pandemic too. The reasons may vary, but a prolonged period of incurring losses by the banks should raise fear in the minds of common people.

What Happens When Your Bank Fails?

When a bank fails, the failed bank tries to borrow money from other major banks of India in order to continue its service. In most cases, when a bank is unable to pay back to its account holders, a crisis of confidence occurs and people rush to the bank to withdraw money.  This makes the situation even worse for the failing bank.

Government Provisions to Tackle Bank Failure:

RBI guidelines mandate all regional banks, commercial banks, foreign banks in India, and cooperative banks to insure deposits under the Deposit Insurance and Credit Guarantee Corporation (DICGC). The Reserve Bank of India also at times intervenes and takes up the decision to sell or merge the failed bank with a major bank, or even take over the operations of the failing bank. In such interventions, account holders can continue using their funds until new passbooks, debit cards, and cheques get issued.

Government Provisions to Tackle Bank Failure

Deposit Insurance in India

In the Union Budget 2020, Govt. of India has increased the deposit insurance limit up to ₹5 Lakhs in case of a bank failure. This means if your bank fails, the maximum amount that will be refunded to you in lieu of your lost deposits is only 5 lakhs. This includes all kinds of deposits: savings, current, fixed, recurring, etc.

What Can Be the Safer Zone in Case of a Bank Failure?

  • If you are looking to open an account, kindly ensure that the bank is insured by DICGC.
  • Open your account in banks that have very little risk of facing bank failure. Banks that have assets valued at more than 2% of the GDP are major banks and considered safe. State Bank of India, ICICI, and HDFC Bank come under this category.
  • It will be very wise if you keep your deposit in multiple banks because not all banks can go bankrupt at once.

We hope you find this information useful. If you are looking for personal loans or credit cards, we are just a click away. Visit here to know more.

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