Lakshmi Vilas Bank crisis: Here's why you should not keep more than Rs 5 lakh in one bank

The failures of Indian banks in the recent times has taught us simple reasons as to why, perhaps, it is good to keep only Rs 5 lakh in a bank.

New Delhi: The Reserve Bank of India (RBI) has placed the Lakshmi Vilas Bank (LVB) under moratorium with immediate effect till December 16, 2020, thereby, staying all actions and proceedings against that banking company during this period.

During the month-long moratorium, the cash withdrawal limit has reportedly been capped for customers at Rs 25,000 in a month. The RBI also said subject to certain exceptions and with its prior permission, the Lakshmi Vilas Bank may allow a depositor to withdraw up to Rs 5 lakh to meet unforeseen expenses towards medical treatment of the depositor or any person actually dependent on him, towards the cost of higher education of the depositor or any person actually dependent on him for education in India or outside India, to pay obligatory expenses in connection with marriage or other ceremonies of the depositor or his children or of any other person actually dependent upon him, or in connection with any other unavoidable emergency if there is sufficient credit in his account.

LVB is the second private sector bank after Yes Bank which has run into rough weather during this year. In March, capital-starved Yes Bank was placed under a moratorium. The government rescued it by asking state-run SBI to infuse Rs 7,250 crore and take 45 percent stake in the bank.

The LVB has about Rs 6,070 crore as deposits in current account/savings account (CASA) and about Rs 14,000 crore in term deposits. Assuring about 20 lakh depositors of LVB, RBI appointed Administrator T.N. Manoharan has asked them to not panic, adding that and all glitches in withdrawal of deposits - subject to a maximum of Rs 25,000 - will be sorted out. On Wednesday, confusion prevailed in some LVB branches with staff not able to explain to the depositors on the restrictions on withdrawals.

Why you should not keep more than Rs 5 lakh in a bank account?

The failures of banks in the recent times has taught us simple reasons as to why, perhaps, it will be a good idea to keep only Rs 5 lakh in a bank. Following the failure of a number of cooperative banks including the Mumbai-based PMC Bank being the largest last year, the budget had permitted the Deposit Insurance and Credit Guarantee Corporation (DICGC) to raise deposit insurance coverage to Rs 5 lakh from Rs 1 lakh.

The DICGC, a wholly-owned subsidiary of the Reserve Bank of India, provides insurance cover on bank deposits. Each depositor in a bank is insured upto a maximum of Rs 5 lakh for both principal and interest amount held by him in the same right and same capacity as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.

But are deposits in different banks separately insured? The answer Yes, if you have deposits in more than one bank, the deposit insurance coverage limit is applied separately to the deposits in each of the banks where you have the deposits. Infact your funds from each bank would be insured separately, even if (for example) you have funds on deposit at two different banks, and those two banks are closed on the same day. This is regardless of the date of closure.

Which banks are insured by the DICGC?

All commercial banks that include branches of foreign banks in India, local area banks as well as regional rural banks are insured by the DICGC. All State, Central and Primary cooperative banks, or in other words, at present all co-operative banks are covered by the DICGC.