What happens to your money if a bank shuts down in India?

Banks are perhaps the safest place where most of us keep our hard-earned money. Be it a savings account or an FD, we all use the services of banks in some way or the other.

But what if one day, your bank unfortunately shuts down? Though the odds of such a thing happening are really low, they are not zero. Remember the collapse of PMC Bank or Lakshmi Vilas Bank? Or the Yes Bank fiasco of 2020? These were some of the recent instances that shook India’s banking industry.

So what really happens to your deposited money if a bank is staring at a dead end? Who protects your money? And to what extent?

Is your money really safe?

In this latest blog of ours, we’ll deep dive and explain all this to you. So read on to know how safe your bank’s deposits truly are.

Who protects your money if a bank shuts down?

The DICGC (Deposit Insurance and Credit Guarantee Corporation), a subsidiary of the RBI (Reserve Bank of India), protects your money in case a bank shuts down. The corporation offers insurance cover for deposits opened with scheduled banks. DICGC was founded in the year 1978 and falls under the jurisdiction of India’s Ministry of Finance.

Its functions are governed under the 'The Deposit Insurance and Credit Guarantee Corporation Act, 1961' (DICGC Act) as well as 'The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961'. These were framed by the RBI.

Why did the RBI create DICGC?

Before we deep dive into the role of DICGC, let us understand when and why the RBI created this subsidiary. On a larger scale, it all started more than six decades ago in the year 1960, when the back-to-back failure of two banks- Laxmi Bank and Palai Central Bank prompted the RBI to first introduce ‘Deposit Insurance Corporation’ (DIC) in 1962.

Before India, the USA was the only country that had introduced such a concept of deposit insurance. The USA’s Federal Deposit Insurance Corporation (FDIC) has been running since 1933.

RBI’s next step came through the formation of a public limited company named ‘Credit Guarantee Corporation of India Ltd. (CGCI)’ on January 14, 1971.

Seven years later, in 1978, the DIC and CGCI were merged and hence the DICGC (Deposit Insurance and Credit Guarantee Corporation ) was formed on July 15, 1978. Even the Deposit Insurance Act, 1961 was amended and renamed as ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961’. This merger was done to integrate the functions of deposit insurance and credit guarantee.

Now let us come back to the big question- how much of your money is protected?

To what extent does DICGC insure your deposited money?

As per DICGC’s insurance program, your bank deposits are insured up to Rs 5 lakh, per bank and depositor, in the event of bank failures. This limit was not always Rs 5 lakh.

Here’s how the insurance cover has grown over the years:

Note that both the interest and the principal component of your deposits are insured for the following types of bank deposits:

• Savings accounts

• Current accounts

• Fixed deposits

• Recurring deposits

The insurance cover, however, is at a bank level, and not account level.

So, for example, if you have Rs 2 lakhs kept in a savings account and Rs 1 lakh as an FD in ‘XYZ’ bank and another Rs 3 lakhs in the FD of ‘PQR’ bank. In such a case, the entire Rs 3 lakh in the first bank and the Rs 3 lakh in the second bank will be separately insured to the full extent. Even though the total of all these deposits is Rs 6 lakhs, remember that DICGC’s Rs 5 lakh coverage is ‘per bank, per depositor’. Since your deposit in each of the two banks is below the threshold limit of Rs 5 lakhs, it is fully insured.

On the other hand, if you had kept, say, Rs 1.5 lakhs in a savings account and Rs 4 lakhs in an FD of the same bank (total deposits coming to Rs 5.5 lakhs), DICGC insurance would only be applicable up to Rs 5 lakh, and not on the remaining deposit of Rs 50,000 in this case.

So now that you know what is covered and how, it’s equally important to know what is NOT covered under DICGC insurance:

• Deposits kept in a Non-Banking Financial Company (NBFC)

• Deposits kept in Land Development Banks

• Mutual funds

• Stocks and bonds

• Exchange Traded Funds (ETFs)

• Cryptocurrencies

• Deposits of foreign Governments;

• Deposits of Central/State Governments;

• Inter-bank deposits

Does DICGC cover all banks in India?

DICGC covers the following banks:

• All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by the DICGC.

• All state, central and primary cooperative banks, also called urban cooperative banks

Here’s DICGC’s list of insured banks under it: https://www.dicgc.org.in/insured-banks . As of March 2025, 1982 banks are insured under DICGC.

You can also check the list of de-registered banks as well as the banks which are put under AID. For the unversed, AID refers to ‘all-inclusive directions", under which RBI places restrictions on banks in order to protect depositors' interests or even the bank's own stability. Banks put under AID may be allowed to continue to operate, but with certain limitations as per the directions stated by the RBI.

Who pays for this insurance? Bank or the customer?

Insurance and premiums go hand-in-hand. Certainly, the DICGC would not provide such an insurance without expecting any premium in return, right? While this insurance protects the depositor’s money kept in the banks, the insurance premium is borne entirely by the bank, and it cannot be passed on to the depositors.

DICGC’s 2024-25 report had mentioned that the total premium collected by DICGC from these banks stood at Rs 26,764 crore, and the total claims settled by DICGC during FY24-25 stood at Rs 476 crore.

Also, DICGC states that no bank can withdraw from this insurance scheme, and it is compulsory. However, on the other hand, DICGC can cancel the registration of an insured bank if it fails to pay the premium for three consecutive periods. But the DICGC needs to give one month's notice to such a bank before cancelling its registration.

Remember that your bank deposits will remain covered under DICGC only until the date when the bank’s registration gets cancelled.

When does DICGC become liable to cover the insured bank’s deposits?

There are three instances wherein DICGC becomes liable to pay the insured amount:

-If a bank goes into liquidation: DICGC is liable to pay to the liquidator (an official appointed by the Registrar of Cooperative Societies (RCS) or Central Registrar (CRCS) to act as the link between the depositors and DICGC) the claim amount of each depositor up to Rs 5 lakhs within 2 months from the date of receipt of the claim list from the liquidator. The liquidator has to disburse the claim amount to each insured depositor corresponding to their claim amount.

However, banks do have the right to set off their dues from the amount of deposits as on the cut-off date. The deposit insurance is then available for the remaining amount after netting off such dues.

-If a bank is reconstructed or amalgamated or merged with another bank: DICGC has to pay the bank the difference between the ‘full amount of deposit or the limit of DICGC cover (Rs 5 lakhs), whichever is lower’, and the ‘amount received by the depositor under the reconstruction/ amalgamation scheme’. This payment needs to be made within two months from the date of receipt of the claim list from the transferee bank.

-If a bank is placed under directions by RBI: DICGC becomes liable to pay an amount payable under section 16 if RBI’s directions prevent depositors from accessing their deposits in the bank.

As per Section 16 of the DICGC Act, DICGC is liable to settle deposit insurance claims of insured banks within 90 days, subject to the submission of a list showing outstanding deposits of each depositor by the insured bank.

The role of bank and depositors in the claim process

• The most important task for depositors is to submit a claim willingness form to the bank. While there is no specific time limit to this task, depositors need to keep two things in mind.

• Firstly, the bank should still be under AID at the time of depositors’ submission of the willingness form. Secondly, given that DICGC needs to settle the depositor claims within 90 days, depositors should ideally try to submit the form within 45 days (of imposition of AID), which is the statutory timeline for banks to submit the depositors’ data and claim list to the DICGC.

• The claim amount (including interest) payable to each depositor is calculated after setting off loans and advances and clubbing of deposits. Banks prepared the depositor-wise list of claim amount after taking the date of imposition of AID as the cut-off date, as per which the list is prepared.

• DICGC is liable to settle the deposit claims within the next 45 days after the bank shares the required forms and lists within 45 days from being placed under AID. This makes the total timeline equal to 90 days for DICGC to settle the deposit insurance.

• Note that in this 45-day period after getting claim forms and depositor’s list, DICGC needs to verify the genuineness and authenticity of the claims made and also ascertain the willingness of each depositor to receive the amount due from the bank. This needs to be done within 30 days out of that 45-day available period.

• Once the verification is done, DICGC needs to pay the depositors within 15 days. This can be done either directly or by getting it credited in the account of the depositors through the insured bank or through the liquidator.

In short, the first 45 days of the total 90-day window involve the bank and depositors submitting the depositor list and claim form, respectively, to the DICGC. Once that is timely done, the next 45 days are important for DICGC to review, verify and settle the claims timely.

What can depositors learn from various banking crises?

Remember the Yes Bank fiasco of 2020? RBI had imposed a month-long moratorium on the bank, including a restriction that customers could withdraw up to Rs 50,000 from their Yes Bank accounts.

Even as recently as this year, the RBI had placed Mumbai-based All India Co-Operative Bank on moratorium and announced restrictions on its deposits and withdrawals.

There have been some more such cases in India’s banking history. These moratoriums are often imposed by the RBI to give banks time to address their underlying issues. When the RBI places a bank under "All Inclusive Directions" (AID), it imposes this moratorium (temporary freeze) on most of the banking activities, especially withdrawals and lending. This gives the concerned bank the time to stabilise.

Meanwhile, your deposits remain insured upto Rs 5 lakh under DICGC. Nonetheless, such restrictions affect the bank’s depositors for sure. After all, not being unable to withdraw your own money from your bank account can be frustrating, right? 

Instances like this can make depositors think about what they can do to minimise the impact of such a banking crisis on them. Well, a simple thing that you, as a depositor, can do is spread out your deposits (FDs, RDs, savings accounts, etc) across multiple banks instead of a single one. This way, if a bank faces a crisis and is placed under moratorium, your entire liquidity does not get affected by it, since you would smartly put money in some other banks as well.

Conclusion

In the end, it’s fair to say that DICGC acts as your dedicated shield against bank failures, offering mandatory insurance coverage of up to Rs 5 lakh per bank, per depositor. Though the insurance premium is paid by the bank, the responsibility of actually exercising your insurance coverage lies with you, the depositor.

Instead of putting all your deposits into a single bank, spread your deposits across different banks to fully leverage the DICGC's insurance limit. Doing so ensures that your deposits, which have been offering you immediate liquidity, continue to remain safe and fully insured.