The Government of India placed Lakshmi Vilas Bank under moratorium for a month on the advice of the Reserve Bank of India.
A limit of Rs 25,000 has been placed on withdrawals by customers.
RBI has allowed some exceptions like medical treatment, higher education fees, and marriage, to allow higher withdrawals.
RBI cited serious deterioration in LVB's finances for the decision.
The central bank has also mooted the merger of the troubled lender with DBS Bank India, the local unit of Singapore's largest bank.
Meanwhile, customers are worried about the withdrawal limit, calling it too low.
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