India’s banking system is one of the most regulated and stable in the world. However, history shows that several Indian banks have collapsed due to fraud, mismanagement, and high non-performing assets (NPAs). When a bank collapses, depositors—everyday people who trusted the bank with their life savings—are often the most affected.
While not every bank failure leads to depositors losing money, it’s crucial to understand how these situations unfold and what happens to people’s savings.
Why Should You Care About Bank Failures?
- Depositors can face years of uncertainty – Even if the government steps in, withdrawals may be frozen for months or even years.
- Not all money is insured – The Reserve Bank of India (RBI) protects only a limited amount of deposits, meaning customers may lose money beyond a certain limit.
- Avoiding risky banks can protect your savings – Some banks offer higher interest rates to attract deposits, but this often means they are financially weak.
- History teaches valuable lessons – Knowing past failures helps us identify warning signs before another bank collapses.
Understanding Bank Deposit Insurance in India
Many people assume that all their money in a bank is safe no matter what happens. But in reality, the Deposit Insurance and Credit Guarantee Corporation (DICGC) protects only up to ₹5 lakh per depositor per bank. This means:
- If you have ₹10 lakh in a bank that collapses, only ₹5 lakh is insured—you may lose the rest.
- This ₹5 lakh limit includes both savings deposits and fixed deposits.
What You Will Learn in This Article
By the end of this article, you will have a clear strategy to avoid financial losses and keep your savings safe.
10 Major Bank Collapses in India & What Happened to People’s Money
Over the years, multiple Indian banks have collapsed due to reasons such as financial mismanagement, fraud, excessive bad loans (NPAs), and regulatory failures. In many cases, depositors faced years of uncertainty, withdrawal restrictions, and financial losses.
Below is a list of 10 major bank failures in India, explaining why they collapsed and what happened to the money of common depositors.
1. Madhavpura Mercantile Cooperative Bank (2001) – A Scam That Led to Disaster
- Reason for Collapse: The bank had huge exposure to stock market operator Ketan Parekh, who defaulted on massive loans. This created a liquidity crisis, leading to a collapse.
- What Happened to Depositors’ Money?
- RBI restricted withdrawals for depositors for years.
- The bank’s license was finally canceled in 2012 after years of failed recovery attempts.
- Many small depositors recovered only a fraction of their funds.
2. Yes Bank (2020) – A Corporate Loan Crisis
- Reason for Collapse: The bank lent heavily to high-risk businesses, leading to huge NPAs (bad loans). The mismanagement of funds led to a financial crisis.
- What Happened to Depositors’ Money?
- RBI placed a ₹50,000 withdrawal limit for customers, causing panic.
- The government rescued the bank by restructuring it, with investments from SBI and other banks.
- Depositors eventually got full access to their money after the revival plan.
3. Punjab and Maharashtra Cooperative (PMC) Bank (2019) – Hidden Bad Loans Led to Collapse
- Reason for Collapse: The bank secretly gave out 73% of its loans to one real estate company (HDIL), which later defaulted.
- What Happened to Depositors’ Money?
- Withdrawals were restricted for over two years (initial limit was ₹1,000, later increased in phases).
- Many senior citizens and small businesses suffered financial hardships due to frozen accounts.
- In 2022, the bank was merged with Unity Small Finance Bank, and some depositors recovered their funds.
4. Global Trust Bank (2004) – Overaggressive Lending
- Reason for Collapse: The bank aggressively expanded its loans without proper risk assessment, leading to financial instability.
- What Happened to Depositors’ Money?
- The RBI forced a merger with Oriental Bank of Commerce to protect depositors.
- All depositors were able to access their full funds post-merger.
5. United Western Bank (2006) – Poor Asset Quality Led to Takeover
- Reason for Collapse: The bank had weak financials and growing bad loans, making it unsustainable.
- What Happened to Depositors’ Money?
- The RBI arranged a merger with IDBI Bank, allowing depositors to retain full access to their funds.
6. Rupee Co-operative Bank (2013-2022) – A Slow Death Over a Decade
- Reason for Collapse: Mismanagement and rising NPAs caused financial instability.
- What Happened to Depositors’ Money?
- RBI imposed withdrawal limits for years, leaving many depositors stranded.
- In 2022, the RBI canceled its banking license, and depositors were dependent on the DICGC insurance of ₹5 lakh per account.
7. CKP Co-operative Bank (2020) – License Canceled by RBI
- Reason for Collapse: Years of financial mismanagement and failure to maintain required capital.
- What Happened to Depositors’ Money?
- The bank’s license was canceled and it was shut down permanently.
- Deposit insurance of ₹5 lakh per depositor was paid by DICGC.
8. Mapusa Urban Co-operative Bank (2015) – Rising NPAs Led to Closure
- Reason for Collapse: The bank couldn’t recover loans and had high non-performing assets (NPAs).
- What Happened to Depositors’ Money?
- RBI restricted withdrawals, creating financial hardships for many depositors.
- Depositors had to rely on DICGC insurance for fund recovery.
9. Lakshmi Vilas Bank (2020) – Weak Finances Led to a Forced Takeover
- Reason for Collapse: The bank faced serious financial troubles due to high NPAs and poor governance.
- What Happened to Depositors’ Money?
- RBI forced a merger with DBS Bank, ensuring that depositors didn’t lose money.
10. New India Co-operative Bank (2025) – Recent RBI Action
- Reason for Collapse: Mismanagement and fund misuse led RBI to take strict action.
- What Happened to Depositors’ Money?
- Initially, withdrawals were frozen, causing panic.
- Later, RBI allowed depositors to withdraw up to ₹25,000, offering partial relief.
Key Takeaways from These Bank Failures
- Government-backed banks (SBI, HDFC, ICICI) are generally safer due to strong financial backing.
- Cooperative banks have a higher failure rate due to weak regulations and riskier lending.
- Private banks can collapse but are often rescued through mergers to protect depositors.
- If your bank fails, the maximum insured amount is ₹5 lakh per depositor per bank.
3. How to Protect Your Money from Future Bank Failures
While bank failures are rare, history shows that they can happen due to mismanagement, fraud, or economic downturns. The good news is that you can take proactive steps to protect your hard-earned savings.
Here are six essential strategies to minimize risk and ensure financial security.
1. Keep Deposits Below ₹5 Lakh in One Bank
Why? The Deposit Insurance and Credit Guarantee Corporation (DICGC) covers only ₹5 lakh per depositor per bank (including both savings and fixed deposits). If a bank collapses, anything beyond this amount may not be recoverable.
What You Should Do:
- Distribute funds across multiple banks to ensure full DICGC coverage.
- If you have more than ₹5 lakh in a single bank, move the extra amount to a second bank.
Example: If you have ₹12 lakh in savings, keep ₹4 lakh in three different banks instead of keeping all in one bank.
2. Choose Banks with Strong Financials and Government Backing
Why? Government-backed banks and financially strong private banks are less likely to fail.
How to Identify a Safe Bank:
- Prefer large, well-established banks like SBI, HDFC, ICICI, Axis, and other RBI-regulated banks.
- Avoid small banks that offer unusually high interest rates—this could be a red flag.
Example: In the past, cooperative banks like PMC Bank and CKP Co-op Bank collapsed due to risky lending practices. If you use a cooperative bank, keep only small amounts there.
3. Check a Bank’s Financial Stability Before Depositing Money
Why? Weak banks show early warning signs before they fail.
What You Should Check:
- CRAR (Capital to Risk-Weighted Assets Ratio): Should be above 10% (higher is better).
- Net NPA (Non-Performing Assets): If NPAs are high, the bank has more bad loans.
- Profitability: Banks consistently reporting losses could be at risk.
Where to Find This Information?
- RBI publishes financial stability reports and alerts about weak banks.
- Visit the bank’s website for annual reports or check financial news sources.
4. Diversify Savings Across Different Types of Financial Institutions
Why? If you keep all your money in one type of bank, you are at risk if that category faces trouble.
How to Diversify Safely:
- Keep a portion of funds in public sector banks (like SBI, PNB) for stability.
- Use strong private banks (like HDFC, ICICI, Kotak) for better services and growth.
- Consider post office savings accounts for additional security.
Example: If you have ₹15 lakh in savings, split it as:
- ₹5 lakh in SBI (public sector)
- ₹5 lakh in HDFC (private sector)
- ₹5 lakh in post office savings
This way, even if one bank collapses, your other deposits are safe.
5. Be Wary of Unrealistically High Interest Rates
Why? Some struggling banks offer very high FD rates to attract deposits and stay afloat. But this is risky—many cooperative banks that collapsed had promised 8-10% FD rates before failing.
What to Watch Out For:
- If a small bank offers an FD rate 2-3% higher than top banks, be cautious.
- Check if the bank has a history of financial troubles.
Example: In 2019, PMC Bank offered higher FD rates than major banks to attract deposits. Later, it collapsed, and depositors lost access to their money for years.
Safer Alternative: If you want high returns, invest in RBI-backed savings schemes (like PPF, NSC) instead of risky FDs.
6. Stay Updated on RBI’s Alerts About Weak Banks
Why? RBI regularly monitors banks and sometimes places restrictions on financially weak banks. Knowing this information early can help you move your funds before a crisis happens.
How to Stay Informed:
- Follow RBI’s official website (www.rbi.org.in) for announcements.
- Read financial news sources like Moneycontrol, Economic Times, and Business Standard.
Example: RBI placed restrictions on PMC Bank and Rupee Co-op Bank months before they fully collapsed. Customers who acted early were able to withdraw their money before stricter limits were imposed.
Conclusion: Stay Informed, Stay Safe
Bank failures are rare but not impossible. By taking proactive steps, you can protect your money from financial risks. Here’s a quick recap of what you should do:
- Keep deposits below ₹5 lakh per bank to ensure full DICGC coverage.
- Choose well-established banks with strong financial health.
- Monitor financial stability reports before making large deposits.
- Diversify savings across public sector banks, private banks, and post office savings.
- Avoid banks offering very high FD interest rates, as they may be struggling.
- Stay updated with RBI alerts and banking news.
Taking these steps doesn’t require much effort but can save you from years of financial stress if a bank collapses. By being a smart and informed banking consumer, you can secure your financial future and avoid unexpected losses.
