Engineer's Finance

Have you ever thought about what would happen if the bank goes bankrupt? Is the money insured with the bank? Who will repay back your amount? Will they pay back the entire amount? If so whether will they pay the entire amount or in parts? What if they don’t pay back any amount? What should I do?

These questions were constantly on my mind after seeing the financial situation of the US Markets. Major financial institutions are crashing and it is creating ripples worldwide as many countries depend directly or indirectly on the US Markets. We all trust that Bank will safeguard our money and deposit the money with them and if they don’t take care of it then what should happen to the trust and the money? This is really going to be a difficult situation to handle. People will start losing trust and take out the money from bank and start piling them up at home. If such a situation happens then the liquidity decreases considerably and there will be very less money that will be floating around.

When a bank goes bankrupt, it is very difficult to handle the situation. The laws are formed to protect the interests of such an individual who has deposited his money in a bankrupt bank. The Deposit Insurance Corporation (DIC) was formed for such a purpose only. When couple of banks started failing in the early 1950 – 60’s. Many people were affected and this promptly made way for the government to think over such a scenario. Initially it was started to cater only the State Bank of India and its branches but later other banks were also included.

Similarly when bank provides credit to small and needy borrowers, the risk of they not paying back was high. Many banks went bankrupt due to this and the government decided to provide support to such banks and started insuring the small credits these financial institutions provided. Credit Guarantee Corporation of India Limited was formed to protect such banks and this was promoted by the RBI.

RBI protects the interests of both the lenders and depositors. Hence RBI merged both these bodies to form a single entity called Deposit Insurance and Credit Guarantee Corporation (DICGC). This body makes sure that everything related to bankruptcy of banks are dealt with. Generally when the bank goes bankrupt, the depositors are given higher priority and once the assets are sold then immediately the depositors are paid back. But the entire amount is not paid back. RBI and DICGC pay back a sum of Rs. 1 Lakh as maximum amount. If the depositor has more than that he loses that amount. A maximum of Rs. 1 Lakh is insured by DICGC and not more than that. It is better to be aware of such details.

My suggestion would be to keep a maximum amount of Rs. 1 Lakh in your bank’s savings account. If you have more than that then better keep the money in various banks rather than in one bank. Let that bank be a government recognized bank rather than private sector bank. There is nothing bad about it but generally government supported banks get higher privilege than private banks during crisis situation.