RBI ‘actively’ monitoring withdrawals and liquidity position at private banks

The Reserve Bank of India (RBI) is actively monitoring deposit withdrawals and liquidity position at private sector banks in the wake of some State governments reportedly advising their public sector undertakings and entities to move deposits to state-owned banks following troubled YES Bank being placed under moratorium.

Depositors’ confidence

This knee-jerk reaction of some State governments to the temporary moratorium on YES Bank seems to have shaken retail depositors’ confidence in private sector banks, prompting some of them to assure savers via stock exchange notices and press statements about their financial health. The central bank has been seeking data on deposit withdrawal and liquidity status from private sector banks over the last couple of days so that it can suitably intervene should there be signs of flight of deposits, said a senior private sector bank official.

No need for concern

The RBI has already written to the State governments asking them not to shift their deposits from private sector banks, stating that concerns about the safety of deposits in these banks were highly misplaced.

The banking regulator emphasised that transferring deposits out of private sector banks could have implications for the financial sector’s stability. The banker quoted above said: “It is unfair to tar all private sector banks with the same brush. Unfortunately, even if one bank gets into trouble, peer banks feel the knock-on effect, leading to panic among depositors. There is herd-mentality among savers.”

Private sector banks have been seeing healthy growth in deposits. According to the RBI’s latest financial stability report, these banks reported a robust 19 per cent year-on-year (y-o-y) growth in deposits as of September-end 2019 against the 6.6 per cent growth for public sector banks.

Mid- and small-sized private sector banks usually offer higher interest on deposits vis-a-vis larger private sector banks and public sector banks.

Following the YES Bank crisis, many other small- and mid-sized private sector lenders such as IndusInd Bank and RBL Bank have also been allaying concerns of shareholders and depositors by underlining their robust third quarter performance as well as strong capital base.

Some State governments, such as Maharashtra, have issued instructions to their departments and civic bodies, advising them not to transact with private banks after the YES Bank crisis, while some other States have also been discussing such a move.

The funds of many civic bodies in Maharashtra, as well as those of temple administration bodies, such as the Puri Jagannath Temple, are also lying with YES Bank.

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