Deposit insurance after a bank is placed under moratorium
A district cooperative bank is placed under an all-inclusive direction (AID) by the regulator, freezing withdrawals. One customer of that bank holds: a savings account with Rs 3,40,000; a fixed deposit of Rs 2,20,000 at another branch of the same bank; and accrued but unpaid interest of Rs 26,000 on these deposits. He also holds a Rs 1,50,000 deposit in a private sector bank that is not under any restriction. He is 61, has no loan outstanding against these deposits, and has never claimed deposit insurance before. At the branch's enquiry counter he asks three things: how much of his money is protected, whether the money at the other branch and in the healthy bank changes the calculation, and how soon he can expect payment. The branch must answer without over-promising, and staff have been told not to confuse the insurance limit with a guarantee of full repayment.
1. Calculate the amount that deposit insurance covers for this customer and state the shortfall, showing which components enter the calculation.
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Rule applied: cover is Rs 5,00,000 per depositor per bank, covering principal and interest, and aggregating all branches of the same bank.
Computation for the failed bank:
| Component | Amount (Rs) |
|---|---|
| Savings account | 3,40,000 |
| Fixed deposit, other branch | 2,20,000 |
| Accrued interest | 26,000 |
| Total deposits in that bank | 5,86,000 |
| Insured | 5,00,000 |
| Uninsured shortfall | 86,000 |
Two points drive the answer. First, the second branch is irrelevant - the unit of cover is the depositor per bank, not per branch or per account. Second, interest is not free of the ceiling; accrued interest is part of the deposit and pushes him past Rs 5 lakh here.
The Rs 1,50,000 in the healthy private bank is outside this entirely: it is a deposit in a different bank, which has its own separate Rs 5 lakh cover and is not affected by the moratorium. The shortfall of Rs 86,000 is not written off - it is a claim on the bank's residual assets through the liquidation process, and recovery is uncertain and slow. Staff should say exactly that, not 'you will get everything eventually.'
2. The customer later reveals he also holds a joint fixed deposit of Rs 8,00,000 with his spouse in the same bank. Explain how insurance applies to joint deposits and what it means for his position and his wife's.
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How joint deposits are treated: the joint holders are treated as separate depositors, so the Rs 5 lakh ceiling is available to each holder separately. The deposit is not insured twice over as a single Rs 8 lakh block, and it is not ignored for either holder; each holder's interest in it is counted against that holder's own Rs 5 lakh limit in that bank.
What it means for him. His own ceiling is already exhausted by the Rs 5,86,000 of single-account deposits, so his share of the joint deposit adds entirely to the uninsured portion. His position becomes: insured Rs 5,00,000; uninsured Rs 86,000 plus his share of the joint deposit. This is the practical trap in the question - customers assume a joint account is a second, fresh Rs 5 lakh pocket for themselves, when in fact a joint holding can only reduce what is recoverable for a depositor who is already at the ceiling.
What it means for his wife. She has her own separate Rs 5 lakh ceiling, and if she holds no other deposits in that bank, her share of the joint deposit is protected up to Rs 5 lakh. Where both holders have other deposits in the same bank, each is assessed on their own aggregate.
Handling note: do not compute the split on the counter. The liquidator determines each holder's insurable interest from the account mandate and records; staff should register the claim and let that determination be made, while explaining the ceiling in principle.
3. Draft the answer to 'how soon will I be paid?' - covering the interim payment route, the ordinary claim route, and one thing the customer must not assume.
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Interim payment route (relevant here, because the bank is under an all-inclusive direction). The deposit insurance framework was amended to allow interim payment of up to Rs 5 lakh to depositors of a bank placed under AID, within 90 days. The insurer does not act on individual letters: it pays on the basis of the depositor list furnished by the bank/liquidator, so the customer's action item is to make sure his contact details and claim particulars are recorded with the bank's authorised representative, not to file a fresh insurance application.
Ordinary claim route. Where interim payment does not apply or the amount exceeds the ceiling, the insurer settles claims received from the liquidator, and the insured amount is paid; the balance is a claim in the liquidation ranked with other unsecured depositors. Timelines there depend on the liquidation, not on the insurer, so no date should be quoted.
What must not be assumed. (a) That the Rs 5 lakh is per branch, per account or per PAN - it is per depositor per bank, and anything above it is not insured, only claimable. (b) That the 90 days is a payment guarantee for the full balance - it is a window for interim payment, capped at Rs 5 lakh. (c) That deposits in other banks are frozen too - they are not. Staff should also avoid presenting the Rs 5 lakh figure as 'your money is safe', because it converts a partial protection into a promise the insurer has not made.