Mumbai : The US Bank Crisis and its effect on the big banks in Europe is being discussed everywhere. But do you know what will happen to your money in if a bank goes bankrupt?
Both US regulators and the government are saying that consumers will not lose their money. But when and how will they get their money back? No one has the answer.
Banking sector in crisis from US to Europe:
Days after the collapse of Silicon Valley Bank in the US, the closure of Signature Bank was announced. Apart from this, the risk of default has increased on more than 6 banks including First Republic Bank.
Global rating agency Moody’s reviewed about half a dozen banks, including First Republic. The tsunami that started in the US banking sector also proved dangerous for Credit Suisse, one of the largest banks in Europe. However, the risk of bankruptcy was averted to some extent due to the loan provided by the Swiss National Bank.
A bank goes bankrupt under such circumstances:
When a bank’s liabilities (debts) exceed its assets and it cannot face the crisis, it becomes insolvent (default). In other words, if a bank’s earnings fall far short of its expenses and it continues to incur losses and fails to recover from the crisis, such a bank is considered insolvent and regulators decide to close the bank.
The process is largely the same in almost all government and private banks. If any bank fails, the biggest hit faces the customers who have deposited their hard earned money in it. Bank try to extract your money at any cost. Sudden overdrafts tend to sink a troubled bank more quickly.
What is the rule of bank failure in India?
Even in India, the facility of deposit insurance for customers in case of bank failure has been in place since the 60s. The Deposit Insurance and Credit Guarantee Corporation (DICGC) of the country, under the Reserve Bank, insures the deposits of customers under these rules.
Before 4 February 2020, deposit insurance on bank deposits in India was only Rs one lakh. That means if your bank deposit is more than 10 lakhs, you will get back only 1 lakh rupees if the bank closes or goes bankrupt.
The Modi government changed this rule and increased the deposit insurance cover from Rs 1 lakh to Rs 5 lakh. That is, customers who have accounts in the bankrupt bank are insured up to 5 lakh rupees.
On the date on which the license of the bank is cancelled or the bank is declared closed, the customer can get a maximum of five lakhs from the deposit and interest in his account.
Deposit insurance system covers all types of deposits including Savings Account, Current Account, Recurring Account, in which the amount deposited is insured. The most important thing here is that under this rule, account holders get paid within 90 days in case of bank collapse.
That is, within a specified time, the customer is paid a fixed sum assured on the amount deposited. A distressed bank is handed over to an insurance corporation within the first 45 days. The process is completed within 90 days without waiting for a resolution.
In India too there has been an upheaval in the banking sector like the situation in America and examples are Yes Bank, Laxmi Niwas Bank and PMC. However, the banks have been saved from collapse. The number of bankrupt banks in America is high. So far more than 500 banks have failed. In this, 157 banks were the most bankrupt in 2010.
