A portion of your savings in bank may not be totally secure. We explain why

Have you ever pondered what might happen to your savings if your bank went bankrupt?

Let's imagine you have money at a major bank, in the form of a fixed deposit, a current account, a savings account or any other deposit.

What happens if that bank goes out of business?

Hey, don’t panic.

Your money is absolutely safe.

If any day your bank shuts down, DICGC protection is present to back you up.

But wait, what is DICGC?

A subsidiary of RBI, DICGC stands for Deposit Insurance and Credit Guarantee Corporation. Such organizations were formed to restore consumer confidence in banking and prevent a banking collapse from occurring.

It was founded on July 15, 1978, under the DICGC Act of 1961, which guarantees credit facilities and offers deposit insurance. When a bank is unable to pay its depositors, DICGC offers deposit insurance to safeguard depositors.

Let us understand it in detail.

DICGC was established to provide asset protection and credit guarantees to minor investors and borrowers in order to promote stability and build public trust in the banking sector. Corporations like the DICGC allow depositors to relax because they know that even if a bank fails, they will still be covered by the DICGC.

But wait, there are some restrictions on the amount covered by DICGC. The maximum amount covered under DICGC scheme is ₹5 lakhs.

Okay let us understand this with an example.

Suppose you have a fixed deposit of ₹4,75,000 and earns ₹40,000 in interest over the course of a year. In a fair scenario, the bank would have to pay a maturity of ₹5,15,000.

However, if the bank fails, the DICGC would cover up to five lakhs in insurance. Any sum in excess of ₹5 lakhs will be uninsured.

Customers' deposits are protected independently at various banks. For example, if a client has deposits with both AA and YY banks, each bank's insurance coverage maximum is up to five lakhs.

I know what you’re thinking.

Can DICGC withdraw its coverage from a bank?

Yes, the accreditation of a bank covered under the DICGC plan may be terminated by the organization if the bank fails to pay three consecutive premiums, according to Section 15A of the DICGC Act.

The insurance is not provided by the DICGC for free; banks must pay a fee to the DICGC. However, banks, on the other hand, do not charge clients for the premium. As a result, it is absolutely free for depositors. The current premium rate is 12 paisa for Rs.100 deposited each year.

When the DICGC revokes coverage from a bank, the public is alerted through the media.

Speaking of that, you might recall, recently in July, RBI placed severe limitations on 17 banks' depositors due to their poor financial situations, including a prohibition on withdrawals.

So yes, we can state that our money is secure in the banks, and corporations like DICGC serve to provide stability and sustain depositor confidence in financial institutions in the case of a financial system failure.