Another bank has collapsed! Know why banks are sinking again and again?

To understand the process of bank failure, look at the following table:

Why do banks fail?

There can be many reasons behind the collapse of banks. Let’s take a look at some of the major reasons:

1. Bad loan policies: If the bank gives large scale loans without proper due diligence, NPAs (Non-Performing Assets) can increase.
2. Excessive risk: Some banks invest more money in high-risk investments, which may lead to losses.
3. Fraud and embezzlement: Fraud from inside or outside the bank can weaken the bank.
4. Economic recession: The decline in the country’s economy also affects the banks.
5. Lack of liquidity: If a bank does not have enough cash, it will not be able to meet its obligations.

Impact on Customers due to bank failure

When a bank collapses, the biggest worry is the customers. They fear for their money. But in India there are some safeguards to protect the interests of depositors:

• DICGC Insurance: Deposit Insurance and Credit Guarantee Corporation (DICGC) insures up to Rs 5 lakh of each depositor.
• RBI intervention: Reserve Bank of India tries to save the bank by timely intervention.
• Merger or restructuring: Sometimes a sinking bank is merged with a stronger bank.

Preventive Measures to prevent bank sinking

Several measures are taken to save the banks from sinking:

1. Strict rules: It is necessary for banks to follow the rules made by RBI.
2. Regular Audit: Banks are audited from time to time.
3. Risk Management: Banks have to make proper strategies to reduce their risks.
4. Capital Adequacy: Banks are always required to maintain a certain ratio of capital.
5. Liquidity norms: Banks are instructed to maintain adequate liquidity.

Warning Signs of Bank Collapse

If you pay attention to these signs, you can predict the collapse of a bank:

• The bank’s share price is continuously falling
• The bank’s NPA is increasing
• The bank is constantly getting fined
• There are frequent changes in the top management of the bank
• Credit rating agencies may be downgrading the bank’s rating

• Role of Government in bank collapse

  When a big bank is on the verge of collapse, the role of the government becomes important:

  1. Financial aid: The government can provide funds to save the bank.
  2. Policy changes: Can make new rules to strengthen the banking sector.
  3. Public Trust: The government assures people that their money is safe.
  4. Merger Facility: The government can help in merging a sinking bank with a stronger bank.

  Historical Examples of Bank Sinking

  Many big banks have collapsed in history, from which we can learn:

  • Financial crisis of 2008: Big banks like Lehman Brothers in America collapsed.
  • Yes Bank Crisis: In 2020 Yes Bank was on the verge of sinking in India but RBI saved it.
  • PMC Bank: Punjab and Maharashtra Co-operative Bank faced a crisis in 2019.

  Economic Impact of Bank Failure

  When a big bank collapses, it impacts the entire economy:

  • Lack of credit: Bank failure makes it difficult to get a loan.
  • Unemployment: Bank employees become unemployed.
  • Market decline: The stock market may decline.
  • Foreign Investment: Foreign investors can withdraw money from the country.
  • Inflation: Inflation may increase in the economy.

  Conclusion

  Bank sinking is a complex process and there can be many reasons behind it. But the general public need not panic. Many safety measures have been taken by RBI and the government in India. The guarantee of up to Rs 5 lakh by DICGC is a big relief. Still, we should keep our money divided in many banks and keep an eye on the financial condition of the bank.

  Disclaimer

  This article is written for informational purposes only. Although bank failures do occur, the banking system in India is quite robust. RBI keeps a constant watch and takes timely action. Still, it is the responsibility of every individual to be cautious about their money.