What is a bank moratorium, and when does it come into play? -K Bharat Kumar
* When does the Reserve Bank of India intervene, and what are some of the key steps it takes?
The story so far: On November 17, the Centre, 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, has been struggling with losses for three years. As its financial position deteriorated, the regulator placed it under the Prompt Corrective Action (PCA) framework, which restricts certain operations depending on the severity of financial stress. After allowing time for the bank to find investors to shore up its capital, the RBI has appointed an administrator for the bank and mooted a merger with the Indian subsidiary of the Singapore-based DBS Bank. Similar moratoria were placed in the recent past on other lenders too, including Yes Bank and Punjab and Maharashtra Co-operative Bank.
* What is a moratorium?
The RBI, the regulatory body overseeing the country’s financial system, has the power to ask the government to have a moratorium placed 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.
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The Hindu, 22 November, 2020, https://www.thehindu.com/business/Economy/the-hindu-explains-what-is-a-bank-moratorium-and-when-does-it-come-into-play/article33151740.ece