India’s Banking Crises and the Evolution of Protections: A Fragile Trust Rebuilt

In March 2025, IndusInd Bank, India’s fifth-largest private lender, sent shockwaves through the nation when it disclosed a ₹1,577-crore accounting discrepancy in its derivatives portfolio, eroding 2.35% of its net worth. Shares plummeted 27%, and depositors like Mumbai shopkeeper Anil Sharma were gripped by fear. “I’ve saved ₹4 lakh for my daughter’s wedding,” he told The Hindu. “Now I don’t know if it’s safe.” Sharma’s panic reflects a recurring nightmare in India’s banking history—a saga of collapses, fraud, and broken trust that spans centuries. From the 1867 Presidency Bank of Bombay crash to modern meltdowns like Yes Bank and Punjab and Maharashtra Co-operative Bank (PMC), India’s banking sector has been a battleground of ambition, mismanagement, and reform. This feature explores the history of banking crises, their devastating impact, the evolution of protections post-independence, and the ongoing struggle to safeguard depositors’ money, weaving together a narrative of resilience and reform for a nation banking on growth.

A Legacy of Crises: From Colonial Collapses to Modern Failures

India’s banking crises are rooted in speculative greed, weak governance, and regulatory lapses. The Presidency Bank of Bombay, established in 1840 by the East India Company, collapsed in 1867 after a cotton boom, fueled by the American Civil War, crashed with plummeting prices. Depositors were left penniless, a cautionary tale that economist John Maynard Keynes later referenced in his 1913 book Indian Currency and Finance, warning that banking in India must be conducted on the “safest possible principles.”

The 20th century brought more failures. The Travancore and Quilon Bank’s 1938 collapse exposed the need for regulation, leading to the Banking Regulation Act of 1949, which empowered the Reserve Bank of India (RBI) to license and supervise banks. Yet, crises persisted. The Palai Central Bank’s 1960 liquidation, driven by fraudulent lending, and the Lakshmi Commercial Bank’s 1985 collapse, due to insider loans, underscored ongoing oversight gaps. The post-liberalisation 1990s saw new private banks falter: of 14 licensed since 1994, four collapsed, and two were absorbed. Global Trust Bank (GTB), a symbol of post-reform optimism, imploded in 2004 after bad loans and accounting fraud, merging with Oriental Bank of Commerce. “I lost ₹2 lakh in GTB shares,” recalls retiree Sunita Rao. “It taught me banks aren’t always safe.”

The 21st century has been no kinder. The IL&FS crisis of 2018, a non-bank failure, triggered a ₹91,000-crore liquidity crunch, impacting banks and NBFCs. Dewan Housing Finance Corporation Limited (DHFL) defaulted in 2019, with investigations revealing fund diversions. The PMC Bank scandal of 2019 exposed a ₹6,500-crore fraud tied to a single borrower, HDIL, leaving depositors like Mumbai executive Jalaja Mehta stranded. “I had accounts in PMC and Yes Bank,” she told the BBC. “Both went under. My trust in banks is gone.” Yes Bank’s 2020 near-collapse, driven by ₹20,000-crore bad loans to firms like Anil Ambani’s Reliance Group, required a ₹10,000-crore bailout led by the State Bank of India (SBI). Lakshmi Vilas Bank (LVB), a 94-year-old institution, failed the same year due to ₹720-crore fraudulent loans to the Ranbaxy brothers, merging with DBS Bank India. In February 2025, the New India Cooperative Bank collapsed with ₹122-crore embezzlement, followed by IndusInd’s crisis, where years of mismarked derivatives led to a ₹2,100-crore balance sheet hit and the RBI demanding the resignations of CEO Sumant Kathpalia and Deputy CEO Arun Khurana.

Timeline of Major Banking Crises in India

The Human and Economic Toll: Lives Upended, Growth Stalled

Banking crises are not just financial—they are human tragedies. Mumbai shopkeeper Mangilal Parihar couldn’t pay staff when LVB restricted withdrawals in 2020. “Our business was hit by Covid, and then the bank failed us,” he told the BBC. PMC depositors, like retiree Prakash Shah, faced medical emergencies without access to funds. “I had ₹6 lakh in PMC,” Shah told India Today. “I felt helpless.” The Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, insures deposits up to ₹5 lakh per depositor per bank, raised from ₹1 lakh in 2020. But for small businesses or retirees with larger savings, this cap is inadequate. “If you have ₹10 lakh in a failed bank, you lose half,” says banking analyst Priya Sharma. In cooperative bank failures like New India, recovery is slow due to limited assets.

Nationally, crises choke growth. Non-performing assets (NPAs) peaked at ₹10.35 lakh crore in 2018, with public sector banks (PSBs) holding 85%, leading to a credit squeeze. Real bank credit growth fell from 25% (2003–2008) to under 10% (2014–2020), stalling private investment and contributing to India’s pre-Covid slowdown. The IL&FS crisis hit MSMEs, which employ millions, hardest. “When banks stop lending, the economy stalls,” says economist Ila Patnaik. Public trust, the bedrock of banking, also erodes. X posts in March 2025, like @Murti_Nain’s claim of a “₹2000 crore scam” at IndusInd, reflect growing panic. RBI Governor Shaktikanta Das noted in 2024 that households are shifting to riskier alternatives like mutual funds and cryptocurrencies, further weakening the banking system.

The Evolution of Banking Protections: A Post-Independence Journey

At independence in 1947, India’s banking system was elitist, with only 2% of the population holding accounts. The RBI, established in 1935, had limited powers under colonial rule. The Banking Regulation Act of 1949 marked a turning point, granting the RBI authority to regulate banks and protect depositors. The 1960s saw the DICGC Act of 1961, introducing deposit insurance to restore confidence after the Palai Central Bank failure. “It was a signal that the government cared about small savers,” says banking historian Amartya Sen.

The nationalisation of 14 major banks in 1969 under Indira Gandhi aimed to expand banking to rural areas and curb private monopolies. By 1980, six more banks were nationalised, and branch networks grew from 8,000 in 1969 to 60,000 by 1990, boosting financial inclusion. However, nationalisation brought challenges—politically driven lending led to NPAs, and PSBs became bureaucratic. The Narasimham Committee reforms of 1991 introduced prudential norms, capital adequacy standards, and liberalisation, paving the way for private banks like GTB. Yet, these reforms couldn’t prevent crises, as GTB’s 2004 collapse showed.

The 2010s brought technological and regulatory advances. The Basel III norms, adopted post-2008 global crisis, strengthened capital and liquidity requirements, reducing NPAs to 2.5% by September 2024. The Insolvency and Bankruptcy Code (IBC) of 2016 streamlined bad loan recovery, though the National Asset Reconstruction Company Ltd (NARCL), a “bad bank,” has recovered only 40–45% of bad loans since 2021. Digital banking, spurred by UPI and Aadhaar-linked accounts, expanded access, with over 50 crore bank accounts opened under the Jan Dhan Yojana by 2025. Yet, cooperative banks remain a weak link, with 1,500 institutions prone to fraud due to lax oversight.

RBI and Government: Oversight Gaps and Reactive Reforms

The RBI’s track record is mixed. Its conservative policies—high reserve requirements and Basel III compliance—shielded India from global crises like 2008. However, microeconomic failures persist. The Yes Bank crisis revealed RBI’s failure to curb bad loans, while PMC’s ₹6,500-crore fraud went undetected despite inspections. IndusInd’s derivatives mismarking, unnoticed despite 2024 accounting guidelines, prompted public outcry on X, with @vikaskhemani questioning RBI’s vigilance. The RBI’s response—ordering a PwC audit and leadership changes—was reactive. “RBI’s macro stability is commendable, but it struggles with bank-specific governance,” says Patnaik.

The government’s role is equally contentious. The withdrawal of the Financial Resolution and Deposit Insurance (FRDI) Bill in 2018, due to political backlash, left the RBI without a robust resolution framework like the US FDIC. PSBs, burdened by politically driven lending, held ₹8.8 lakh crore of NPAs in 2018. Bailouts, costing ₹35 billion from 2005–2009, strain taxpayers, while PSB privatisation remains stalled. RBI Governor Sanjay Malhotra’s 2025 call for real-time supervision and technology-driven compliance highlights a path forward, but implementation lags.

Key Banking Protections in India

The Path Forward: Rebuilding Trust for a Billion Dreams

India’s banking crises underscore a truth: trust is the lifeblood of finance. For depositors like Anil Sharma, safety is paramount. “I want to know my money won’t vanish,” he says. Raising the DICGC cap to ₹10 lakh, as demanded post-New India, could bolster confidence. Reviving the FRDI Bill would enable swift bank resolutions, minimising losses. For the nation, reducing NPAs through rigorous due diligence, as suggested by a 2016 Down to Earth report, is critical. Insulating PSBs from political interference or privatising them could curb reckless lending. The RBI must leverage technology for real-time fraud detection, as Malhotra urged in 2025.

India’s banking system is robust—capital ratios exceed 9%, and liquidity coverage is 135.6%—but isolated failures like IndusInd, described by Malhotra as an “episode, not a failure,” chip away at confidence. As Keynes warned, banking in India is “dangerous” without the safest principles. For a billion depositors and a nation banking on growth, the cost of broken trust is too high to ignore. The journey from colonial collapses to modern safeguards shows resilience, but the vault of trust must be fortified to secure India’s financial future.