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  • What happens when a bank goes bankrupt?

    Ever wondered what happens if a bank goes bankrupt? Searching for detailed information regarding such a situation? On this page our experts have responded to your concern.

    What happens to our money when bank goes bankrupt. Its heard we lose the money if bank
    goes bankrupted.Its also said other bank merges with failed bank.If thats true will our money transferred to merged bank.What happens to interest rate if bank is merged.
  • Answers

    8 Answers found.
  • Each depositor in a bank is insured up to a maximum of Rs.1,00,000 only (Rupees One Lakh) for both principal and interest amount held by him in any bank.
    The bank deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC). This is a subsidiary of the Reserve Bank of India.
    In the budget 2020, it was proposed to increase this maximum limit of the amount was proposed to increase to Rs.5,00,000/-
    So if any bank goes bankrupt you may get that insurance amount and the amount will be a maximum of Rs.5,00.000/- including your principal and interest. If your amount is less than 5 Lakhs you will get whatever is the actual amount. If your amount is more also you will get only Rs.5,00,000/-. The premium for this insurance will be borne by the bank. If you have any dues to the bank that will e deducted from the insured amount.
    This insurance scheme applies to all the banks in India including private banks also. If you have accounts in different branches of the same bank, all will be treated as one account only and you will be given a maximum of Rs,5,00,000/- only. If you have accounts in different banks they will be treated as different accounts.
    RBI will disclose every year the names of banks designated as Domestic Systemically Important Banks (D-SIBs) D-SIB. The chances for these banks to go bankrupt are less. It is always better to choose such banks. But there is no guarantee for more than Rs.5,00.000/-
    If the bank in which you have deposited is merged into another bank, your accounts will get shifted automatically into the new bank and you need not worry. The rates will be as mentioned by your bank and when it gets renewed only the new rates will start coming into force.

    always confident

  • It is interesting to note that banks fail often. It is not very uncommon. As per the information available in many places in internet about 665 banks failed in India during the period from 1947 to 1969. In 1969 the nationalisation of banks put a break on this but still after that about 36 banks failed but RBI tried to merge them with other existing banks to help the depositors. It is not that banks fail in India only. As per the information in the internet about 555 banks failed in US since 2000 till date. The main reason of a bank failing is the non recovery of loans, mismanagement, and other fraudulent practices. In one word it can be described as corrupt practices also.

    If a bank goes bust or bankrupt then there is a nominal amount which is being paid by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the Reserve Bank of India (RBI). Earlier this amount was Rs 1 lakh but now it is raised to Rs 5 lakh.

    If we go in the history of bank failures worldwide then there are so many such failures here and there and are very fearful in respect of the magnitude of the funds siphoned out by fraudulent practices.

    Knowledge is power.

  • If bank faces bankruptcy:

    - Every individual depositor is guaranteed to get Rs 5 lac against the total amount deposited(if the amount is more than 5 lac) in the bank under any stream like savings/current accounts/ fixed/recurring deposits. Moreover, if such an individual has more than one accounts in other branches of the same bank which has gone bankrupt all accounts will be considered as one account and he will be entitled to recover only Rs 5 lac as an aggregate amount against all his accounts.
    - But if he has one or more account in other branch/s of the same bank as a guardian of a minor or trustee or director of a business entity or has a joint account with his wife or partner, in this situation account/s will be considered as a separate account.
    - But if the same partners have several joint accounts in several branches of the same bank which has been bankrupt will be considered as an individual account on behalf of them and they will get only Rs 5 lac only against all their joint accounts provided that their names appear in the same order in all three branches of the same bank like- Ravish Rakesh, Lalit. but if this order is changed in other two branches of the same bank as joint account holders e.g. Rakesh, Lalit, Ravish in the second branch and Lalit, Ravish, Lalit in the third branch then all three joint accounts will be considered as three separate accounts and thus they will be entitled to get Rs 15 lac against their three joint accounts.

  • How can a bank fail? In simple words, a bank is said to be failed when it cannot give back the depositor's money as and when demanded. How can this happen? This can happen when there is not sufficient liquidity with the banks. That can happen when they have lent out all the capital money and also the depositor's money on long term loans and also when the owner's capital as well as depositors money is diverted to other banking un-related purposes. This used to happen in early days when many private and proprietary banks were in operation. Even the owners used to run away after collecting depositor's money. (This happens here and there even now, but not as banks but as non-banking enterprises or individual activities)
    Many such private banks failed and depositors lost their money.
    That was when banks were nationalised in India. From then on the nationalised banks were owned by the Central Government and they had the backing of the government. In order to make credit available to the common man and masses, nationalised banks were directed to lend to priority sections at low interest rates. Banks were also directed to open new banks only in rural areas. Due to political propaganda there was a mistaken feeling among the borrowers that such loans need not be repaid. Most nationalised banks were to content with huge number of such bad loans.
    The government being the owner pumped more money to save the banks.
    In the next phase, the economy was 'opened up' and new generation private banks were also opened.
    While nationalized banks were subjected to lot of statutory restrictions, the new private banks relative enjoyed more freedom. Gradually nationalised banks were also allowed o have private shareholding to a certain percentage.
    However, devoid of any social commitments private banks were aiming huge profit to show to their shareholders. In that process they lend to big business houses, and to business houses in some way related to the directors of the bank itself. Some banks failed.
    At the same time nationalised banks were compared with private banks in performance and they were also tempted to lend big ticket loans under various compulsion. Many such loans did not come back and these banks were burdened with huge NPAs. However the government had to save them as they are owned by government.

    As of now, there are capital norms and various statutory restrictions or banks and there are mechanisms and legal avenues for NPA recovery. So bank failure may not be so easy, if the regulatory controls are well exercised and no deliberate mala fide actions are done.

    However, in case a bank fails, under the Deposit insurance facility a depositor is insured to a maximum of Rs 5,00,000/- . Moreover just as a company is liquidated, there will be such processes in evaluating the assets and liabilities and accordingly the depositors may get their proportionate amount as per the final settlement.
    But practically, the government will not allow this, because bank failure can have detrimental effect in the image and rating of the economy. So the RBI and Central Government will step in and do some remedial measure. That may be time consuming too.
    Generally, there will be some warning signals emanating from such instances. The regulator (RBI/Government) will immediately put in restrictions like stopping further lending or restrictions certain operations. The bank is given some Corrective directions to come back healthy. If that fails, there will be moratorium also. The depositors will be allowed to withdraw only limited amounts.

    The present Central Government (mainly due to international pressure) is planning certain amendments in banking regulations. It may not be good news to depositors. They are planning to make rules that when a bank is facing crisis, the deposits may be used to tide over the problem and the deposits will be treated as long term liabilities only. It is only as a prior soap that the DICGC insurance cover for deposit is increased to Rs5,00,000/-.
    Presently due to the strong objection of bank unions on behalf of depositors this unfavourable amendments are held for the time being.
    In fact government and economist are now encouraging to borrow and spend. Savings is discouraged and borrowing is encouraged by decreasing the interest on both.

    Prudent says that you may keep your deposits segregated in different names (of your family members) and in different banks. As the saying goes, 'Do not keep all your eggs in one basket".

  • Banks do a variety of business and financial transactions and earn money from that. Traditionally the main earning of banks was from the difference of the interest rates paid to the depositors then that of interest realised on the loans. This difference is generally in the range 2-3 % though in earlier times it used to be more. So more the banks have deposits and more the banks give loans the earnings increased. There is a catch here. Suppose the loan is not recovered due to various factors that we are seeing happening today then what will happen is that bank's earnings would decrease and a time will come when bank will not be able to give the salary to its employees what to say the cost of maintaining the bank. That is the stage at which banks go bankrupt and then to safeguard the customers some insurance scheme is provided which at present will compensate only up to Rs 5 lakh to the customer who is the sufferer without any fault of his. It means that there should be very strict loan recovering mechanism otherwise more banks will follow the same fate.

    Thoughts exchanged is knowledge gained.

  • In case, a bank fails the depositors would be compensated to a max of Rs 5,00000/- as per existing provision of insurance rendered by Deposit Insurance and Credit Guarantee Corporation Of India being a subsidiary of RBI. This is indicative of the maximum limit which a customer can get in the event of declaration of bankruptcy. If the amount is lesser, compensation would be proportionate. This applies that in no case the case, the principal coupled with interest is to exceed the threshold limit. If the principal amount is Rs 4,99999/- and the interest earned is Rs 3887/-, the customer would get the former amount and the interest amount would be forfeited.
    If the depositors have the accounts in two banks but now both the banks have merged to make one identity, compensation would be considering one bank only and the amount would be clubbed for the finalisation of the compensation.

  • The Reserve Bank of India (RBI) has made a new announcement in this regard. According to RBI, bank account holders up to Rs 5 lakh have been insured. … That is, in the event of a bank sinking, the account holder will get a guarantee on a deposit of Rs 5 lakh. Earlier, the bank failed to get a guarantee on deposits of up to one lakh rupees only. If the bank has gone bankrupt or it has suffered a loss, it may be that your money deposited in that bank will compensate that loss. If a bank fails, the corporation will provide deposit insurance to the bank to a certain extent. This limit is fixed at 5 lakhs. Before this limit, bank deposits of up to one lakh rupees are insured. There are some banks whose crisis had deepened in the last few days. After this, the Reserve Bank intervened in the case. Or it can be taken as an exercise to reduce the risk of the customer. If a bank or a company offering financial services falls into the critical category, a plan is prepared to handle it. Under this, steps such as cancellation of the bank's liability can also be taken, depositors' money can also come in this bell-in-clause. Financial resolution and deposit insurance are designed to deal with the insolvency situation of financial institutions. Whenever a bank will not be able to do its business and it will not be able to return the deposits of the people, then FRDI will help that bank to emerge from this crisis. In the event of failure of any bank, insurance company, and other financial institutions, this is to get them out of this crisis. In this provision, depositors' money will be used to give loans to the sinking financial company from the crisis. It allows this provision.

  • The most common reason for bankruptcy or insolvency of banks is an increase In Non-performing assets or most commonly known as NPA. It is a situation when the bank debtors(loan takers) are not returning their money due to insolvency or some other reason or in case of fraud. On knowing these rumours starts spreading among the creditors of the bank that they might lose their money and hence they start withdrawing their deposits. In such a case the bank faces crises from both sides leads to its insolvency. Bank uses the process of credit creation to provide loans on some basic assumptions but sometimes its assumptions prove wrong and which results in complete failure.

    In such a case RBI came into the picture because being the apex banking institution of the nation it is one of the main functions of RBI as the "lender of last resort." It means that if there is no way to support banks then RBI as the last hope provides credit to banks. The reason for such is because RBI wants to maintain the trust of people in the banking system of the nation to maintain complete transparency and confidence of credit.
    Now coming to the main point, RBI provides a guarantee to every lender of the bank maximum security of 5 lakhs rupees as per new guidelines earlier which were one lakh.
    For instance that if a person has deposited ten lakh rupees then he will get five lakh rupees out of his ten lakh. But the biggest disadvantage is that he would lose his rest five lay rupees and in case the deposit is larger loss would also be larger.

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