Financial Literacy

TOPIC: Bank Failure and

Deposit Insurance
Submitted By:
Nayan (2019UIT3056)
Shahbaz(2019UIT3034)
 BANK FAILURE
A bank failure occurs when a bank is unable to meet its obligations to
its depositors or other creditors because it has become insolvent or too
illiquid to meet its liabilities. More specifically, a bank usually fails
economically when the market value of its assets declines to a value that
is less than the market value of its liabilities. The insolvent bank either
borrows from other solvent banks or sells its assets at a lower price than
its market value to generate liquid money to pay its depositors on
demand. The inability of the solvent banks to lend liquid money to the
insolvent bank creates a bank panic among the depositors as more
depositors try to take out cash deposits from the bank. As such, the bank
is unable to fulfill the demands of all of its depositors on time. Also, a
bank may be taken over by the regulating government agency if
Shareholders Equity (i.e. capital ratios) are below the regulatory
minimum.
What Happens When a Bank Fails?
When a bank fails, it may try to borrow money from other, solvent
banks in order to pay its depositors. If the failing bank cannot pay
its depositors, a bank panic might ensue in which depositors run on
the bank in an attempt to get their money back. This can make the
situation worse for the failing bank, by shrinking its liquid assets as
depositors withdraw them from the bank.
Ideally, depositors who have money in the failed bank will
experience no change in their experience of using the bank; they’ll
still have access to their money, and should be able to use their
debit cards and checks as normal.
When the failed bank is sold to another bank, they automatically
become customers of that bank, and may receive new checks and
debit cards.
BANK FAILURES IN INDIA

 Failure of Reserve Bank of India

 1. Absence of co-ordination in the money-market.
 2. Absence of proper banking facilities .
 3. There is no uniformity in interest rates.
 4. Absence of well developed bill market and Others.
 Reserve bank is simply a toothless watch dog.
 7. Failure to Function as the Lender of the Last Resort.
 8. Reserve bank has failed to secure equitable share for the Indian banks in
foreign exchange business.
 9. Instability situation in the internal value of the rupee.
BEST SAFE BANKS IN INDIA

 1) HDFC Bank
 2) State Bank of India
 3) ICICI Bank
 4) AXIS Bank
 5) Kotak Mahindra Bank, IndusInd Bank, Yes Bank
 6)IDBI Bank
DEPOSIT INSURANCE

 Deposit insurance is a measure

implemented in many countries to protect
bank depositors, in full or in part, from
losses caused by a bank's inability to pay
its debts when due. Deposit
insurance systems are one component of
a financial system safety net that
promotes financial stability.
DEPOSIT INSURANCE SCHEME IN INDIA

 Deposit Insurance and Credit Guarantee Corporation. Deposit Insurance and

Credit Guarantee Corporation (DICGC) is a wholly owned subsidiary of Reserve
Bank of India. DICGC insures all bank deposits, such as saving, fixed, current,
recurring deposit for up to the limit of Rs. 100,000 of each deposits in a bank.
 The strong regulation and supervisions by RBI ensure that the banks are well
capitalized and effectively regulated.
WHO ARE INSURED BY THE DICGC?

 The corporation covers all commercial and co-operative banks. All bank
deposits, savings, fixed, current and recurring payable in India are covered.
However, the DICGC does not include the following types of deposits:
 Deposits of foreign governments
 Deposits of central/state governments
 Inter-bank deposits.
 Deposits of the state land development banks with the state co-operative
bank
 Any amount due on account of any deposit received outside India
ECONOMIC IMPACT

 When a nation state has a deposit insurance scheme, foreign investors (aka
non-resident bank depositors) are more likely to passively deposit larger
amounts of money in the banks of said nation state (that has a bank deposit
insurance scheme).
 Having a bank deposit insurance schemeguarantees that a nation state will
more likely have a higher rate of passive foreign investment.
 Passive foreign investment in a nation state's finance system allows for more
lending to be made when global finance system conditions constrict the
amount of lendable money.
 Deposit insurance enables banks to increase the money supply, without it
underfunded banks might suffer a bank run which is prevented by the
insurance. This encourages inflation.