The Hindu Explains | What is a bank moratorium, and when does it come into play?


When does the Reserve Bank of India step in and what are the main actions it is taking?

The story so far: On November 17, the Center, acting on the recommendation of the Reserve Bank of India (RBI), imposed a moratorium on Lakshmi Vilas Bank (LVB) for a period of 30 days. The 94-year-old bank, based in Karur, Tamil Nadu, struggled with losses for three years. As his financial situation deteriorated, the regulator placed him in the context of rapid corrective actions (PCA), which restricts certain operations depending on the severity of the financial tensions. After giving the bank time to find investors to consolidate its capital, the RBI appointed a director of the bank and proposed a merger with the Indian subsidiary of DBS Bank based in Singapore. Similar moratoriums have recently been imposed on other lenders, including Yes Bank and Punjab and Maharashtra Cooperative Bank.

What is a moratorium?

The RBI, the regulatory body that oversees the country’s financial system, has the power to ask the government to put in place a moratorium on a bank’s operations for a specified period of time. Under such a moratorium, depositors will not be able to withdraw funds at will.

Editorial | Another rescue: on the Lakshmi Vilas bank

Usually there is a cap that limits the amount of money that can be withdrawn by customers from the bank. In the case of LVB, depositors cannot withdraw more than ₹ 25,000 during the one-month moratorium period. In most cases, the regulator will allow the withdrawal of funds of a larger amount in an urgent need, such as a medical emergency, but only after the depositor has provided the required proof.

Often, the moratorium is lifted even before the original deadline has been reached. For example, Yes Bank, which entered a spiral while trying unsuccessfully to find an investor, was placed on a one-month moratorium as of March 5, with a ceiling of ₹ 50,000 on withdrawals. With investors led by the State Bank of India (SBI) injecting ₹ 10,000 crore into Yes Bank, the moratorium was lifted on March 18.

When does it come into play?

Usually, the RBI will step in if it judges that a bank’s equity is eroding quickly and it may reach a state where it may not be able to repay its depositors. When a bank’s assets (primarily the value of loans to borrowers) fall below the level of liabilities (deposits), it risks defaulting on its obligations to depositors.

Read also | RBI rejected DBS offer to buy 50% of Lakshmi Vilas Bank in 2018, promoter says

After the nationalization of banks in 1969, the RBI sought to always intervene to protect the interests of depositors and prevent commercial banks from going bankrupt. In 2004, he pushed the Oriental Bank of Commerce (OBC) to buy ailing private lender Global Trust Bank (GTB). As in the case of LVB, GTB had time to find a contender for a merger. When it failed to come up with names, but proposed an infusion of foreign capital, the RBI refused permission and instead insisted on the merger with OBC.

How does a moratorium prevent a “run” on the bank?

A moratorium primarily helps prevent what is known as a ‘bank rush’, by curbing rapid outflows of funds by cautious depositors, who seek to withdraw their money for fear of the looming bank collapse. . Temporarily, this affects depositors who may have, for example, placed their retirement with the bank, or creditors to whom the bank owes funds but who have difficulty with collection.

A moratorium gives both the regulator and the acquirer time to take stock of the real financial situation of the troubled bank. It allows a realistic estimate of assets and liabilities and allows the regulator to facilitate the injection of capital if it deems it necessary. Singapore’s DBS bank has pledged to inject ₹ 2,500 crore into the merged entity, once it takes control of LVB.

Read also | Lakshmi Vilas Bank Depositors Safe, Says RBI Appointed Administrator

A key objective of a moratorium is to protect the interests of depositors. Even if they are temporarily disabled due to limited access to their funds, there is a high likelihood that the bank will soon return to normal operation once a rescue is organized.

Is the security of funds ensured?

It depends on whether the troubled bank or the regulator is able to find buyers or investors to save the day. In the case of Yes Bank, the RBI was able to attract investors who injected sufficient funds. Along with Lakshmi Vilas Bank, the regulator had a ready acquirer with a strong capital base in DBS Bank India. In the case of the Punjab and Maharashtra Co-operative Bank, headquartered in Mumbai, the moratorium – although it has been gradually relaxed for depositors – is still in effect, more than a year after being imposed, and there is still no sign of a buyer.

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