From Shirpur Merchants to PMC: What happens to your money when banks fail

Deposits up to Rs 5 lakh are refunded within 90 days from the start of the moratorium when banks go bankrupt

The Reserve Bank of India (RBI) has recently imposed restrictions on Shirpur Merchants' Co-operative Bank in Maharashtra due to its deteriorating financial condition. As a result, customers cannot withdraw their funds for the next six months, Business Standard reported. This measure is similar to past actions taken against other banks, such as PMC Bank and YES Bank, aimed at safeguarding the bank's stability.

What should you do now?

If you're a customer of Shirpur Merchants' Co-operative Bank, it's crucial to understand your rights and the steps you can take during this period.

What are your rights if a bank fails?

Deposit insurance: The Deposit Insurance and Credit Guarantee Corporation (DICGC) Act ensures that each depositor is insured up to Rs 5 lakh, covering both the principal and interest amounts across all account types within the same bank.

Eligible depositors can claim their insurance up to Rs 5 lakh by submitting their willingness to the DICGC, as per the regulations.

How will you receive your money?

Previously, accessing funds in failed banks could take months. However, amendments to the DICGC Act in 2021 have streamlined this process:

90-day refund: Deposits up to Rs 5 lakh are refunded within 90 days from the start of the moratorium. This period is split into two phases: the first 45 days for the bank to gather and submit claim details to the DICGC, followed by another 45 days for DICGC to process and pay the claims.

"DICGC aims to settle the claims of insured depositors promptly, typically within two to three months from the date of receipt of the claim list from the liquidator of the failed bank," states Adhil Shetty, CEO of Bankbazaar.com.

"In the event of a bank's liquidation, the claims of insured depositors are given high priority. Insured depositors are compensated before other creditors in the liquidation process," he explains.

He further elaborates, "DICGC provides insurance cover for both the principal sum and interest up to a maximum of five lakh rupees. For example, if an individual has an account with a principal sum of Rs 4,95,000 and accrued interest of Rs 4,000, the total amount insured by DICGC would be Rs 4,99,000.

However, if the principal sum in the account is exactly Rs 500,000, the accrued interest would not be covered by the insurance. This exclusion is not because it is interest, but because it represents an amount exceeding the insurance limit."

Are all your deposits insured?

DICGC provides coverage for all types of deposits, including savings, fixed, current, recurring, etc., except for the following categories:

a) Deposits of foreign governments

b) Deposits of central/state governments

c) Inter-bank deposits

d) Deposits of state land development banks with a state co-operative bank

e) Any amount due on account of any deposit received outside India

f) Any amount specifically exempted by the corporation with prior approval from the Reserve Bank of India.

If your deposits in a single bank exceed Rs 5 lakh, you will only be insured for up to Rs 5 lakh, including both the principal and interest.

What about different branches or joint accounts?

Coverage across branches: The DICGC insures all deposits across different branches of the same bank, but the total coverage is capped at Rs 5 lakh.

Joint accounts: The DICGC treats single and joint accounts separately, meaning each is insured up to Rs 5 lakh.

Shirpur Merchants' co-operative bank customers can now:

1. Reach out to bank officials for detailed information.

2. Visit the DICGC website (www.dicgc.org.in) for further guidance on the claim process.

RBI's statement on Shirpur Merchants' co-operative bank

In a press release dated April 8, 2024, the regulator said, " From the close of business on April 8, 2024, the bank shall not, without prior approval of RBI in writing, grant or renew any loans and advances, make any investment, incur any liability including borrower of funds and acceptance of fresh deposits, disburse or agree to disburse any payment whether in discharge of its liabilities and obligations or otherwise…"

The regulator also said: "Considering the bank's present liquidity position, no amount from the total balance across all savings bank or current accounts or any other account of a depositor may be allowed to be withdrawn, but are allowed to set-off loans against deposits subject to the conditions stated in the above RBI directions."