New India Co-operative Bank fiasco: What happens if your bank faces a crisis? Here’s how RBI steps in

Tightening its grip on financially stressed banks, the Reserve Bank of India (RBI) has imposed strict curbs on Mumbai-based New India Co-operative Bank Limited. The regulator has barred the bank from issuing new loans, accepting fresh deposits, or processing withdrawals for the next six months, citing financial instability. This move signals the RBI’s commitment to maintaining financial discipline and protecting depositor interests.

The RBI has directed the bank to halt all financial operations, including granting loans, renewing advances, making investments, and disbursing payments without prior approval for the next six months. Consequently, customers are currently unable to withdraw funds from their accounts.

However, the RBI and the government have always prioritised protecting customer interests in such eventualities. Banks are covered by insurance, and deposit accounts are protected up to a certain limit by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Adhil Shetty, CEO of BankBazaar.com, said, "As per the amended DICGC Act, customers should be able to access their deposits with the bank within 90 days of a moratorium being declared by the RBI. All cooperative banks come under DICGC. A similar set of provisions on deposit insurance that covers scheduled commercial banks is also extended to cooperative banks. So, in case the bank goes into a moratorium, the same protections will kick in. You will be able to access up to ₹5 lakh invested with the bank. This covers both principal and interest, so long as it is within ₹5 lakh."

The RBI will issue instructions from time to time on when the process will begin and how you can access your funds. "You may be allowed withdrawals for urgent expenses like medical treatments, education, and weddings. In this case, the bank is permitted to set off loans against deposits. So, if you have a loan with the bank, it may be adjusted against your deposits, potentially reducing your liabilities," says Shetty.

It is essential to remember that practically no bank in India has collapsed since 1960. Even in the case of stressed cooperative and private banks, there is still light at the end of the tunnel in the form of mergers. The RBI has consistently reiterated that it will not let any bank collapse, and customers’ interests have always been a priority. So, the chances of banks collapsing are very low. Even in the worst-case scenario, deposits of up to ₹5 lakh would be covered.