What is Bank Moratorium?

On November 17, the Indian government imposed a moratorium on the Lakshmi Vilas Bank (LVB) on the recommendations of the Reserve Bank of India, the country’s central bank. The bank has been placed in a moratorium of 30 days as the bank was struggling with losses from the last few years. After imposing a moratorium, RBI has appointed T. N. Manoharan as an administrator for the bank and has proposed its merger with the Indian subsidiary of DBS Bank. Before LVB, a bank moratorium has also been imposed on Yes Bank, Maharashtra Co-operative Bank, and Punjab Co-operative Bank.

What is Bank Moratorium?

Bank Moratorium is a process under which the central bank asks the central government to suspend the operations of a bank for a period of time to improve its financial conditions. This power is held by RBI as per the Banking Regulation Act 1949. Under this, period several limitations are imposed on the bank like it is not able to sign any agreements and make investments. Also, the depositors are not able to withdraw funds as per their wish. Generally, a limit for withdrawal is set by RBI.

Banking Regulation Act 1949

The Banking Regulation Act, 1949 is an act that provides provisions for regulating all the banking organizations in India. The act was passed as the Banking Companies Act 1949 and came into force from 16th March 1949. The name of the act was changed to Banking Regulation Act 1949 on 1st March 1966. As per Section 45 of the act, RBI has the power to recommend or apply to the Central Government for the suspension of business of a bank or banking company and prepare schemes for its amalgamation or reconstitution. RBI has the power to give directions to banks and banking entities in the country through Section 35 A of the act.

Why moratorium is imposed?

RBI monitors the financial conditions of the banks. If the central bank finds that the net worth of the bank is declining rapidly and it may not be able to pay the funds of the depositors, it uses such measures.

Is the money of depositors safe after bank moratorium?

If RBI finds a suitable buyer for the banking entity then there is no threat to funds like in the case of Yes Bank, the central bank was able to find the investors. If there are no buyers then the deposited funds come at a risk.

Lakshmi Vilas Bank under Bank Moratorium

For the last 3 years, the Bank has been facing continuous losses. Because of this, the Bank was also placed under Prompt Corrective Action (PCA) from September 2019. Since the conditions of LVB have not improved it has been placed under Moratorium for 30 days (till 16th December 2020) as per the provisions of Section 45 of Banking Regulation Act 1949.

Also, the bank cannot make any investment or payments to depositors, dispose off any properties, agree to disburse any payment, or enter into any agreement as per Section 35 A of the banking regulation act.

RBI has now proposed a merger of LVB in the Singapore-based DBS bank.