Money & Banking

Private banks: Now, RBI can frame reconstruction scheme without putting moratorium in public domain

K R Srivats New Delhi | Updated on June 25, 2020 Published on June 25, 2020

The logo of Reserve Bank of India   -  REUTERS

Call this a fallout of the recent YES Bank debacle and its subsequent rescue episode.

The Centre has now decided to empower the Reserve Bank of India (RBI) to handle mishaps in private banks (any banking company) without allowing any loss of public confidence and disruption in financial system.

The much talked about Banking Regulation (Amendment) Ordinance 2020 – which was approved by Cabinet on Wednesday — will also allow RBI to prepare a reconstruction scheme without having to first make an order of moratorium on barring deposit withdrawals, official sources said.

As per the existing provisions, a scheme of reconstruction or amalgamation under Section 45 of Banking Regulation Act can only be prepared during the period of moratorium. The practice of introducing moratorium was seen as disruptive as it carried the risk of undermining depositor confidence and financial stability. The provision of Section 45 was last invoked in the YES Bank case.

As the economic situation arising from the Covid-19 pandemic has increased the stress in both cooperative banks and private banks, the new ordinance proposes to contain the necessary legislative amendments to empower the RBI to deal better with the stress in private banks, sources added.

Put simply, currently when the RBI finds something wrong in a bank, it has to impose a moratorium and appoint an administrator. Once the moratorium comes into effect, the bank cannot lend, and existing depositors cannot withdraw beyond a specified amount. Unless this moratorium is in place, the RBI cannot consider any takeover, merger or amalgamation. However, once a bank is put under moratorium, panic and loss of confidence in the banking system ensues among the public. Also, value also gets eroded for the identified entity. “So now, without imposing a moratorium, the RBI is being allowed to find suitors for the stressed bank. The RBI is now being allowed to do its job without creating panic among the public or disruption in the financial system,” a former chief eecutive officer of a public sector bank said.

Public confidence

Incidents like YES Bank showed that public confidence in the banking system takes a severe beating when a moratorium is announced. This also quickly erodes the value of the enterprise. It has other ramifications too. A case in point being how the Maharashtra government gave directions to its government departments not to park monies in private sector banks. Not only YES Bank, but all private sector banks lost business on this account.

Published on June 25, 2020
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