Bank Moratorium

The Reserve Bank of India (RBI) recently recommended the Government of India to impose a moratorium on Lakshmi Vilas Bank (LVB). The bank was struggling with losses for past three years. The bank was also placed under the Prompt Corrective Action (PCA) framework because of deteriorating financial conditions. However, RBI Later proposed the merger of the stressed bank with DBS India.

About Bank Moratorium?

Bank Moratorium is a regulatory term that is imposed by the central bank (RBI). Through this regulatory power, the Reserve Bank of India (RBI) restricts the withdrawal of funds for some specified period. Under the moratorium, depositors cannot withdraw funds at their will. However, the regulator can allow the withdrawal of funds in case medical emergency after providing required proof.

Objective of the moratorium

Bank moratorium is imposed on the stressed banks to protect the interests of depositors and to protect the banks from failing.

When a bank is put under moratorium?

The RBI can put any public or private bank under moratorium:

  1. When the bank starts making continuous losses.
  2. When the net worth of the bank starts eroding fast and it is unable to payback its depositors.
  3. When the assets of the bank fall below its liabilities.
  4. When the confidence of depositors is shaken and they rush to the banks to withdraw the funds out of fear.

How moratorium is helpful?

A moratorium can helps prevent the bank from failing in following ways:

  1. By restricting the rapid outflow of funds by the depositors who rush to withdraw their deposits out in fear of collapse of the bank.
  2. The moratorium does not affect the depositors or creditors who are owed funds by the bank.
  3. It provides regulator and the acquirer some time to take stock of the actual financial situation of the stressed banks.
  4. The process helps in estimating the assets and liabilities and helps in arranging the bailout for the stressed banks.

Facts for Prelims

Under the Prompt Corrective Action (PCA) framework, stressed banks are put to watch by the RBI. The framework helps in checking the problem of Non-Performing Assets (NPAs). It alerts the regulator, investors and depositors when the bank starts stressing out. The primary objective is to tackle the problems before they turn into a crisis. while, the Bail out Clause means extending financial support to a company or a bank that is facing bankruptcy threat. It can be provided in the form of loans, cash, bonds or stock purchases.

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