Why did RBI impose moratorium on Lakshmi Vilas Bank?

The Reserve Bank of India recently imposed a moratorium on Lakshmi Vilas Bank of India for a period of thirty days. The apex bank has also drafted a scheme for the merger of the bank. Under the scheme, the Lakshmi Vilas Bank is to be amalgamated with the DBS Bank of Singapore.

Why was Lakshmi Vilas Bank put under moratorium?

The Chennai-based bank has a network of 563 branches. It holds deposits of Rs 20,973 crores. The bank had undergone a steady decline in the last three years. It has been experiencing continuous withdrawal of deposits and very low levels of liquidity. The bank failed to raise adequate capital to address its issues. In September quarter of the financial year 2020-21, the bank posted net loss of Rs 397 crores as against Rs 112 crores in June quarter. Around one-fourth of the bank advances have turned into bad assets. Also, the non-performing assets of the bank were at 25.4% of its advances in the September quarter. The RBI has put a cap of Rs 25,000 on withdrawals from the bank.

What is moratorium?

It is temporary suspension of financial activities until issues are resolved.

Can RBI undertake revival plans without a moratorium?

Yes. In June 2020, the Banking Regulation (Amendment) Ordinance was promulgated by the President of India. Later the Banking Regulation (Amendment) Act was passed in September 2020. Accordingly, the RBI can take revival plans without imposing moratorium.

Other recent financial institute collapses

  • In 2018, the IL&FS collapsed leading to liquidity issues.
  • In March 2020, the RBI imposed 30-day moratorium on Yes Bank following an asset quality review by the central bank. The impaired loan ratio of the bank was high.
  • The Punjab and Maharashtra Cooperative Bank was hit by a loan scam.

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