The collapse of the US-based Silicon Valley Bank (SVB) has raised concerns over the safety of money deposited in banks, as the fallout awakens ghosts of India’s PMC Bank crisis in 2019. While bank deposits in India are now secured up to Rs 5 lakh per person per bank, the depositors of PMC Bank found back in 2019 that their money wasn’t available for withdrawals. The banking sector remains under pressure with some economists predicting even a bigger collapse than 2008. ”The US banking system is on the verge of a much bigger collapse than 2008… Mass withdrawals from depositors seeking higher yields will result in a wave of bank failures,” tweeted Peter Schiff, financial commentator and Chief Economist & Global Strategist at Europac.
What happens to your money if a bank collapses? How much of it would you get back?
Bank deposits are currently secured up to Rs 5 lakh per person per bank, at all commercial banks such as State Bank of India, HDFC Bank, etc; all urban cooperative banks, such as Saraswat Bank, Cosmos Bank, etc; and even payments banks such as Paytm Payments Bank, Airtel Payments Bank, etc. The government of India provides deposit insurance for bank deposits. This insurance is provided by the Deposit Insurance and Credit Guarantee Corporation. If a bank fails, the DICGC will provide insurance coverage up to Rs 5 lakh for each depositor per bank. To be sure of whether a bank is insured under DICGC, a depositor may check with the respective bank branch.
What if you have Rs 5 lakh each deposited in two different banks?
The deposit insurance coverage is applied separately to the deposits in each bank. So if a depositor has money in two different banks, then both deposits will be covered separately to the extent of Rs 5 lakh each under the deposit insurance coverage. If an individual has two accounts in the same bank with an amount totalling more than Rs 5 lakh, then the total cover will be limited to Rs 5 lakh. “Deposits kept in different branches of a bank are aggregated for the purpose of insurance cover and a maximum amount of up to rupees five lakhs is paid,” according to the Reserve Bank of India
What happened with PMC Bank deposits? Why were depositors not paid despite coverage?
RBI on September 24, 2019, restricted withdrawals from Punjab & Maharashtra Co-operative Bank (PMC) accounts after a loan fraud was uncovered. The withdrawals were allowed upto Rs 1000 per account for the next two days; the withdrawal limit was then raised to Rs 10,000 per account for the next seven days; it was then raised to Rs 25,000 for the next 11 days; then Rs 40,000 for next 22 days; then Rs 50000 for next few months and then it was raised to Rs 1 lakh. At the time, the deposit insurance covered a sum of only upto Rs 1 lakh per depositor, but was later increased to Rs 5 lakh. DICGC settled claims totaling Rs 3,791.55 crore, repaying money to 8,47,506 traceable depositors. However, later reports suggest that some of the PMC Bank depositors are still struggling to get some of their money back.
Which bank deposits are not insured?
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;
-Deposits of State Land Development Banks with the State cooperative 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
How do banks work?
Banks take funds from people and in return give them some interest on their deposits and then lend those funds to those who need it, charging a higher interest rate. The difference between the interests is the net income of the bank.
How do banks collapse?
Banks have a broad depositor and borrower base which allows them to lend short-term deposited money for the long term. The broad customer base also ensures that not all depositors will cash out their funds at the same time. Similarly, not all borrowers are expected to collapse at the same time. If a bank provides the majority of loans to a single group or individual then the chances of collapsing increase. To avoid concentration risk, RBI has set Urban Co-Operative Banks (UCBs) exposure limits for a single borrower/party and a group of connected borrowers/parties at 15% and 25%, respectively.