Bank Failure

Reviewed by Sujaini | Updated on Aug 27, 2020

What is Bank Failure?

The closing of an insolvent bank by the regulator is known as a bank failure. The comptroller of the money has the authority to shut down national banks; banking commissioners in the respective states close state-chartered banks. Banks close when they do not meet their responsibilities to depositors and others.

The bank deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India (RBI).

What Happens When a Bank Fails?

When a bank shuts down, it will lend cash from other, solvent banks to pay its account holders. If the failing bank is unable to pay its depositors, a bank panic might take place where depositors run to the bank to get their money.

This worsens the situation for the failing bank, by decreasing its liquid assets as depositors pull out money from the bank. When a bank fails, the RBI will either sell the failed bank to another solvent bank or take the operation of the bank over itself.

Ideally, account holders who have accounts in the failed bank will not experience any change using the bank with new ownership. They will still have access to their cash and should be able to use their debit cards and cheques. When the failed bank is sold to another bank, the former customers automatically become the customers of the reformed bank and may receive new checks and debit cards.

When necessary, the RBI will take over failing banks in India to ensure that depositors have access to their funds, and prevent a bank panic.

Customers of the failed bank can now withdraw up to Rs 40,000 as per the newest enhanced limit. Under the current bank deposit insurance scheme, deposits of up to Rs 1 lakh is insured and paid back to the depositor in the case of a bank failure.