Another bank in crisis: RBI stops customers from withdrawing money; what are your rights as depositors if your bank fails?

Customers of Shirpur Merchants’ Co-operative Bank in Maharashtra cannot withdraw money from their accounts now after the latest direction of the Reserve Bank of India (RBI). Amid the deteriorating financial condition of the bank, the RBI has imposed several restrictions on Shirpur Merchants’ Co-operative Bank, including withdrawal of funds by customers for the next six months. This move has created panic among thousands of depositors of the co-operative bank as they cannot access their savings.

This is not the first time the RBI has put such directions on lenders. Earlier, the regulator imposed similar curbs on withdrawals in PMC Bank and YES Bank.

What are the rights of customers when a bank fails or is put under a moratorium? What should the customers of Shirpur Merchants’ Co-operative Bank do now? Let’s find out here.

Restrictions on Shirpur Merchants’ Co-operative Bank: What RBI says

Before we delve into the nitty-gritty of customer rights, let’s find out what the RBI’s instructions are. In a press release dated April 8, 2024, the regulator said, ” From the close of business on April 08, 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the total balance across all savings bank or current accounts or any other account of a depositor may be allowed to be withdrawn, but are allowed to set-off loans against deposits subject to the conditions stated in the above RBI directions.”

What are your rights as depositors if a bank fails?

In case a bank fails, each depositor in the bank has a deposit insurance cover of up to Rs 5 lakh that includes the principal and interest amount in their accounts in that particular bank, according to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act. The insurance cover amount applies to all deposits taken together, whether held in the current account, savings account, fixed deposits, and so on.

What will customers of Shirpur Merchants’ Co-operative Bank get?

For the customers of Shirpur Merchants’ Co-operative Bank, the regulator said, “The eligible depositors would be entitled to receive deposit insurance claim amount of his/her deposits up to a monetary ceiling of ₹5,00,000/- (Rupees five lakh only) in the same capacity and in the same right, from the Deposit Insurance and Credit Guarantee Corporation, under the provisions of Section 18A of the DICGC Act (amendment) 2021, based on submission of willingness by the concerned depositors.”

When will customers of Shirpur Merchants’ Co-operative Bank get their money back?

Earlier, the depositors had to wait for months to get hold of their accounts stuck in a failed banks or if the bank was put under moratorium. In a bid to provide some relief to customers of such lenders, the Centre amended the Deposit Insurance and Credit Guarantee Corporation Act (DICGC) in 2021. Now the customers of failed or stressed banks that are placed under moratorium will get their deposits (of up to Rs 5 lakh) back within 90 days of the start of the moratorium.

The 90 days will be divided into two periods of 45 days. “The stressed bank is expected to collate all information regarding the number of claimants and claim amount and inform DICGC about it within the first 45 days. Within the next 45 days, DICGC is mandated to process the claim and make payment to each eligible depositor,” Finance Minister Nirmala Sitharaman had said while announcing the amendments.

For the customers of Shirpur Merchants’ Co-operative Bank, the RBI said, “The depositors may contact their bank officials for further information. Details may also be accessed on the DICGC website: www.dicgc.org.in.”

Is your deposit insured by deposit insurance?

Do keep in mind that the DICGC covers all deposits such as savings, fixed, current, recurring and so on except the following: a) deposits of foreign governments; b) deposits of central/state governments; c) inter-bank deposits; d) deposits of the 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 the previous approval of the Reserve Bank of India.

If the total of all the deposits held by an individual in a single bank exceeds Rs 5 lakh, then he/she will be able to get only Rs 5 lakh, inclusive of principal and interest amount, if the bank goes bankrupt.

Deposit insurance: What if you have accounts at different branches of the same bank?
Currently, the insurance cover offered by the DICGC covers all accounts of a depositor, even if the accounts are held in various branches of the same bank. But the maximum coverage is Rs 5 lakh. Therefore, if you have more than one account with the same bank (even if in different branches), you will be insured for only Rs 5 lakh only.

What will happen to your joint accounts when a bank fails?

According to the RBI, both single and joint accounts will be separately covered under the DICGC scheme.

For instance, you have a savings account that is operated solely by you and another one jointly operated with your spouse in the same bank. In case your bank fails, both the accounts will be separately insured under the deposit insurance scheme. This means each account will be covered up to Rs 5 lakh.