Private Banks: Now, RBI Can Frame Reconstruction Scheme Without Putting Moratorium In Public Domain
Money & Banking
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.
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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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.
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
A letter from the Editor
Dear Readers,
The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill.
In these difficult times, we, at BusinessLine, are trying our best to ensure the newspaper reaches your hands every day. You can also access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute.
But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.
I appeal to all our readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. You can help us by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section.
Our subscriptions start as low as Rs 199/- per month. A yearly package costs just Rs. 999 – a mere Rs 2.75 per day, less than a third the price of a cup of roadside chai..
A little help from you can make a huge difference to the cause of quality journalism!
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