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Depositor Insurance and Risk-Free Banking

Risk-Free Banking

Over the years, banking has evolved as a social, customer-driven industry with increased checks and balances to safeguard customer assets. The government has also made many provisions in the law to make banking for people (like you and me) a risk-free experience. However, you can’t deny the fact that not only banks can fail, but they can also take away your money when they shut shop. You should be aware of different options for safeguarding your money in case of a bank failure.

Government Measures to Provide Risk-Free Banking:

In order to safeguard the money of the common man, the Government has multiple regulations in place.

  1. Depositor Insurance and Credit Guarantee Corporation (DICGC) provides insurance up to ₹ 5 Lakh to individual depositors in case of a bank failure. Most of the major banks are covered by DICGC.
  2. RBI takes over banks that are likely to fail. RBI also merges such banks with bigger and more financially healthy banks. The biggest assurance for the Indian Banking customer is that the central authority of RBI has not let any big bank sink.

Apart from these safeguards that are in place, it is also essential to know that risk-free banking is a hoax. 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.

There are certain terms and jargon that are not understood by all. Let us have a look at these terms and their significance in risk-free banking!

Risk-Free Banking

Moratorium: A moratorium is a phase when most of the activities of a bank get frozen. In India, Banking Regulation Act, 1949 (Section 45) grants the power to the RBI to place a moratorium for up to six months (can also be extended). The agenda of bringing such provisions in place is to identify solutions and prevent further degradation of the bank.

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

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

Lack of credible information and financial illiteracy made people assume that depositing cash in banks is a fool-proof way of investment; it is definitely not.  Thus, it’s time to be aware of your bank’s current status, rating, and educate yourself financially.

Read this article to know more about bank crisis: What to Do When Your Bank is in Trouble.

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