What Happens to the Deposits if a Bank Closes?

7 min read • Published 19 November 2022
Written by Anshul Gupta
If A Bank Closes What Happens To The Deposits?

Banks are exposed to several risks that are an inherent part of any banking business. Events such as geo-political tensions, sluggish growth of the economy, rise in crude oil prices, and change in government policies and regulations can escalate the risk exposure, leading to insolvency of banks. Such a situation would put your savings at risk. 

To protect depositors from financial hardships caused due to the insolvency of banks, the Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence in 1978. In India, the DICGC insures your deposits if a bank closes.

Let’s know what happens to a depositor’s money if a bank closes in India.

 What Happens to My Money if the Bank Closes?

Your bank deposits such as savings, fixed, current, and recurring, are safe to some extent owing to the insurance coverage given by DICGC. In case your bank becomes insolvent, you will get an amount of up to ₹5 lakh. The insurance covers both your principal and earned interest amounts.

However, if you hold deposits in different branches of the same bank, all your deposits will be combined, and the maximum amount that you can claim is up to ₹ 5 lakh.

Can I Get Insurance Coverage of More Than ₹ 5 Lakh? 

You can get an insurance coverage of more than ₹ 5 lakh in situations explained below:

  • Deposits Held in Different Types of Ownership in the Same Bank

If you hold a deposit in your name in a bank and if you hold another deposit, say, in joint ownership in the same bank, you will be eligible for total insurance coverage of up to ₹ 10 lakh, i.e., both your deposits will be separately insured. The different types of ownership of a deposit, apart from joint ownership, could be as a partner of a firm, guardian of a minor, director of a company, etc.

However, if more than one deposit is jointly held, separate insurance coverage for each deposit depends on the order of the account holders’ names. This situation is explained  in detail below:

  • All Account Holders’ Names Are in the Same Order

If the account holders’ names are displayed in the same order in all the joint accounts held in different branches of the same bank, the total coverage limit will remain at ₹ 5 lakh.

Let’s assume that three individuals named X, Y and Z have 2 joint accounts in ABC bank’s two different branches. Both the accounts display the account holders’ names as X, Y and Z, one after another, without any variation in the order. In this scenario, DICGC will merge all the deposits of these 2 accounts and will be liable to give you total insurance coverage of up to ₹ 5 lakh only.

  • All Account Holders’ Names Are in Different Order

If the order of account holders’ names is jumbled, all the joint accounts will be considered separate, even though they are in the same bank.

Let’s assume that three individuals, X, Y and Z have 2 joint accounts in ABC bank’s two different branches. The account holders’ names are displayed as X, Y, Z in one account and as Z, Y, and X in another account in different orders. In this scenario, both these accounts will get insurance coverage of up to ₹ 5 lakh each if the bank closes. So, X, Y and Z will get ₹ 10 lakh cumulatively.

  • Deposits Held in Different Banks

If you hold deposits with more than one bank, the insurance coverage limit of ₹ 5 lakh is applied separately to the deposits in each bank.

Now that you know how much money is insured if the bank fails, you should also be aware of DICGC and its insurance policy.

What is DICGC?

DICGC is an institutional body under the Reserve Bank of India (RBI). It gives insurance coverage to different kinds of bank deposits, including: 

  • Current Account Deposits
  • Savings Account Deposits
  • Fixed Deposits
  • Recurring Deposits

Which Deposits are not Insured by DICGC?

Following are some of the deposits that are not insured by DICGC:

  • Inter-bank deposits
  • Deposits of Central and State Governments
  • Deposits of foreign governments
  • State Land Development Banks’ deposits in their cooperative banks
  • Any amount due on account of any deposit received outside India
  • Any amount, which has been specifically exempted by DICGC with the previous approval of RBI

When is DICGC Liable to Pay Insurance Amount?

DICGC provides insurance coverage to all depositors of banks under the following situations:

  • Liquidation of a bank 
  • Licence Cancellation of an insured bank for some reason
  • Merger or Amalgamation of a bank with another bank 

How Does the Deposit Insurance System Work?

As a bank account holder, you do not need to pay any premium for the insurance coverage provided by the DICGC. Banks are responsible for paying a certain premium to secure their customer’s deposits. When banks face closure, DICGC will be liable to extend the insurance coverage to respective beneficiaries.

Which Banks are Insured by DICGC?

The following types of banks are insured by DICGC:

  • Commercial Banks: These include nationalised, private commercial banks along with regional rural banks, local area banks, and Indian branches of foreign banks.
  • Cooperative Banks: These include primary, central, state, and urban cooperative banks in India.

What is the Claim Process with DICGC?

Here are the stages of the DICGC claim settlement process:

Stage 1: Banks prepare a claim list of all deposits and send it to DICGC. This list includes the principal and interest amounts standing to the credit of each depositor, in addition to their names and addresses.

Stage 2: At this stage, banks send signed consent forms obtained from depositors to DICGC.

In this regard, you also need to know that if you fail to provide your consent within 90 days, your claim in respect of any outstanding deposits will not be accepted. 

Stage 3: At this last stage, DICGC disburses the due coverage amounts in favour of the depositors.

Read More: What Is the Best Alternative to Savings Accounts?

Final Word

In India, commercial and cooperative banks need to secure their customers’ deposits with a DICGC insurance policy. If a bank closes, its depositors become eligible to receive up to ₹ 5 lakh. The deposit insurance system of India, managed by DICGC, plays a very important role in contributing to the financial stability of the banking system.

Frequently Asked Questions

How can I know whether my bank is covered under the DICGC insurance policy?

After DICGC insures banks, it provides them with a printed registration copy that contains information about the protection. A list of insured banks is also published on the website of DICGC. If you have a doubt about whether your bank is registered under the DICGC insurance protection, you can reach out to a branch official.

Can DICGC cancel the insurance coverage of a bank?

Yes, DICGC can cancel the insurance coverage of a bank if it does not pay the insurance premium for three consecutive terms. In such a scenario, DICGC also publishes a notification about cancelling a bank’s insurance coverage in the newspaper so that people may become aware.

Will a depositor get money directly from DICGC?

No, in the case of liquidation, DICGC pays the money to the liquidator of the bank and the liquidator is responsible for paying the depositors. In the case of mergers and amalgamations, the money is paid to the transferee bank, which becomes liable to pay the depositors.

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Anshul Gupta

Co-Founder
IIT Roorkee Alumnus and CFA with experience of structuring debt products worth more than 15000Cr for institutional and retail investors.

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