The Insolvent Bank and the Loan Against the FD
Meera, a retired teacher, holds in Bank X: a savings account of ₹2.4 lakh, a fixed deposit of ₹4.2 lakh, and a recurring deposit with a balance of ₹0.9 lakh. She also holds ₹3.0 lakh in a savings account with Bank Y. She has taken a personal loan of ₹3.0 lakh from Bank X, secured against her fixed deposit. Her son is the nominee on all the Bank X deposits. Bank X is placed under a moratorium and later goes into liquidation. Meera asks the branch recovery agent three questions: how much of her money is protected, whether the loan she owes reduces it, and whether her son being nominee gets the family a second cover.
1. Compute how much of Meera's money is insured and how much is uninsured, stating the principle you applied.
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Principle: deposit insurance cover is ₹5 lakh per depositor per bank, and all deposits held by the same person in the same bank in the same capacity (savings + FD + RD) are aggregated before the limit is applied. Different banks are counted separately.
Bank X: 2.4 + 4.2 + 0.9 = ₹7.5 lakh → insured ₹5.0 lakh, uninsured ₹2.5 lakh. Bank Y: ₹3.0 lakh → insured in full.
Total protected: ₹8.0 lakh. Total exposed: ₹2.5 lakh.
The trap to avoid: adding three separate ₹5 lakh covers for the three Bank X products. Splitting deposits across products inside one bank does not multiply the cover; only splitting across banks (or across genuinely different capacities, such as personal versus a sole-proprietorship account) does.
2. How does the ₹3 lakh loan against the FD change the payout, and does the nominee create extra cover? Answer both, with the underlying reason.
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Loan set-off: yes, it reduces the payout. Before the insured amount is paid, Meera's dues to the bank are set off against her claim. On the Bank X side she owes ₹3.0 lakh, so the net claim admitted is 5.0 − 3.0 = ₹2.0 lakh, and the ₹2.5 lakh that was already uninsured stays uninsured. Practical point: the FD that 'secured' the loan gives her no comfort here - the security is being enforced at the same moment the insurance is being calculated.
Nominee: no extra cover. A nominee is only a recipient of the money on the depositor's death; the nominee does not become a separate insured depositor, and the limit is counted per depositor per bank, not per nomination. Her son being nominee creates no second ₹5 lakh.
Useful forward-looking advice: had the ₹0.9 lakh RD and part of the savings been held in a third bank, the uninsured ₹2.5 lakh would have largely disappeared. Insurance is a limit per bank, so structuring across institutions, not across products, is the only lever - and it must be done before the bank fails, not after.