Banks, Accounts and UPI
What a bank actually does with your money, why your deposit is safer than you might think, and the one UPI rule that stops most fraud.
The morning depositors could withdraw only ₹1,000
In September 2019, customers of Punjab and Maharashtra Co-operative Bank in Mumbai found that the RBI had placed the bank under restrictions after discovering that a huge share of its loans had gone to a single troubled real estate group and had been hidden in its books. At first, depositors could withdraw only ₹1,000 each. Some had their life savings, their children’s fees and their business cash in the bank. The limit was raised step by step, but many waited years to get all their money back.
The crisis changed the rules. In February 2020, the government raised deposit insurance from ₹1 lakh to ₹5 lakh per depositor per bank, and in 2021 it amended the law so that insured depositors of a failed bank are paid within 90 days. Most Indians never think about any of this, which is mostly a good sign. But knowing how banks use your money, and what protects it, is the difference between panic and calm on the day something goes wrong.
Savings account or fixed deposit? See the difference
The FD earns ₹12,815 more, in exchange for locking the money for 3 years.
Choose an amount and a period. Rates shown are typical 2026 figures and differ by bank.
What a Bank Actually Does
A bank is a middleman between people who have money they do not need right now and people who need money they do not have yet. Depositors put their savings in. Borrowers take loans for homes, cars, education and businesses. The bank pays depositors an interest rate and charges borrowers a higher one. The difference between the two, called the spread, pays for staff, branches, technology and bad loans, and what remains is profit.
This is why a bank cannot hand every depositor all of their money on the same day. Most of it has been lent out for years at a time. Banks keep part of their deposits as cash with the RBI, the cash reserve ratio, which was cut to 3% in late 2025, and part in government bonds, the statutory liquidity ratio. The rest is working in the economy, which is the whole point of having banks.
Accounts: Savings, Current, FD and RD
Different accounts trade off access against returns. The right one depends on when you will need the money.
Savings account: for everyday money and an emergency fund. You can withdraw any time, but interest is low, often around 2.5% to 3% at large banks.
Current account: for businesses that make many transactions. It usually pays no interest.
Fixed deposit (FD): you lock a sum for a fixed period, from seven days to ten years, and earn a higher, guaranteed rate. Breaking it early usually costs a small penalty.
Recurring deposit (RD): you deposit a fixed amount every month for a set period. It is a disciplined way to save towards a goal a year or two away.
Interest from savings accounts and FDs is taxable as income, and banks deduct TDS on FD interest above a threshold. Senior citizens usually get a slightly higher FD rate. Small finance banks often pay more than large banks, but carry a little more risk, which deposit insurance limits for amounts up to ₹5 lakh.
KYC, PAN and Aadhaar
To open any bank account, mutual fund or demat account you complete KYC, short for Know Your Customer. Usually that means a PAN card, Aadhaar and a photograph, and today it is often done by video in a few minutes. KYC exists to stop fraud, tax evasion and money laundering by making sure every account belongs to a real, identifiable person.
Students under 18 can open accounts too, as minor accounts operated with a parent or guardian, and many banks offer zero-balance accounts for students. Under the Pradhan Mantri Jan Dhan Yojana, more than 50 crore basic accounts have been opened since 2014, many for people who had never had a bank account before.
How Safe Is Your Money?
Indian banks rarely fail, and when they get into trouble the RBI usually arranges a merger or rescue so that depositors lose nothing, as it did with Yes Bank in March 2020. But the final safety net is deposit insurance, run by the RBI’s subsidiary DICGC. It covers each depositor’s money in each bank, including interest, up to ₹5 lakh.
The limit is per bank, not per account. Two FDs of ₹4 lakh each in the same bank are covered only up to ₹5 lakh in total. The same two FDs in two different banks are each fully covered. Families with large savings often spread them across banks for exactly this reason.
UPI, NEFT, RTGS and IMPS
India has several ways to move money between bank accounts. UPI is the one most people use, for payments from a few rupees up to ₹1 lakh for most purposes. NEFT, RTGS and IMPS are older systems that still matter for larger transfers: IMPS is instant and works around the clock, NEFT settles in half-hourly batches, and RTGS is meant for large amounts of ₹2 lakh and above.
Deep Dive: Why Banks Fail, and Why Most Do Not
Banks borrow short and lend long. Your savings can be withdrawn tomorrow, but the home loan your money funded runs for twenty years. Economists call this maturity mismatch, and it is both what makes banks useful and what makes them fragile. If too many depositors want their money at once, even a healthy bank cannot pay everyone immediately. That is a bank run, and fear alone can start one.
Banks fail for real when their loans go bad. If borrowers stop repaying, the loans become non-performing assets, and the bank’s own capital is used up covering the losses. PMC Bank failed because of hidden bad loans to one group. Regulation exists to stop that: the RBI sets capital requirements, inspects banks, limits how much they can lend to one borrower, and steps in early when it sees trouble. Deposit insurance then removes the reason for small depositors to panic, which makes runs much less likely.
Case Study: The PIN Rule
UPI is fast and free, which makes it a favourite tool of fraudsters. The most common trick is the collect request. Someone pretending to buy an item you listed online says they will send an advance and asks you to “accept” a request. The screen says “Pay ₹5,000”. If you enter your PIN, money leaves your account. It never arrives.
One rule stops almost all of this: you never need to enter your UPI PIN to receive money. A PIN is only ever for sending. Anyone asking you to scan a QR code, approve a request or share an OTP “to receive a refund” is trying to take money from you. If it happens, call the national cybercrime helpline, 1930, immediately and report it on cybercrime.gov.in. Speed matters, because banks can sometimes freeze stolen money if they are told within hours.
Check yourself
0/12 answered1. How does a bank mainly make money?
2. Why can a bank not return every depositor’s money on the same day?
3. Which account best suits money you might need any day?
4. A recurring deposit is useful because it:
5. Up to how much does DICGC deposit insurance cover per depositor per bank?
6. You have two FDs of ₹4 lakh each in the same bank. How much is insured?
7. According to Fig 3.2, how long did deposit cover stay at ₹1 lakh?
8. What is KYC for?
9. Which payment system is designed for transfers of ₹2 lakh and above?
10. A buyer asks you to approve a UPI request so they can “send” you ₹5,000. What should you do?
11. What usually causes a bank to fail for real, rather than just suffer a run?
12. If you are a victim of UPI fraud, the first step is to:
Visit the websites of two banks, one large public or private bank and one small finance bank. Note the savings account rate and the one-year FD rate at each. In 150 to 200 words, explain where you would keep a ₹50,000 emergency fund and where you would keep ₹5 lakh saved for a goal in two years, using what you learned about access, returns and deposit insurance.