Since 1999, there have been at least 12 banks that have been put under a moratorium by the Reserve Bank of India. Lakshmi Vilas Bank became the latest to be at the receiving end of this step due to its failing financial health.
The restrictions were imposed under sections 35 or 45 of the Banking Regulation Act, and it grants the RBI special powers to supersede a bank's board, inhibit lending, investments and withdrawals or any action it may deem necessary and to unveil amalgamation or reconstruction plans. The RBI undertakes such activities in the public interest, or that of a bank's depositors, or of the banking system as a whole. When banks have a deteriorating financial situation or are subject to mismanagement, the RBI can take this route to nurse the bank till it is prepared for a capital infusion, merger or change in management.
Lakshmi Vilas Bank's moratorium is the third such imposed over the last 14 months. Punjab and Maharashtra Co-operative Bank (PMC Bank) and Yes Bank saw themselves under such moratoriums in September 2019 and March 2020 due to fraud and inadequate capital respectively.
"What we have seen in Yes Bank's restructuring or PMC going down the street, or LVB, is that it has nothing to do with externalities, these are all man-made. These are all made by the management and the promoters who did not follow the norms. They were not running the banks the way it should have been run," said Tamal Bandhopadhyay, veteran banking analyst and journalist to BOOM's Govindraj Ethiraj.
Excluding these three, the other eight banks in the list saw themselves merging with other private or public sector banks. The currently beleaguered Laxmi Vilas Bank seems to be going down this path too, with the RBI having unveiled a draft plan to merge it with DBS Bank India. The simultaneous announcement of the merger draft with the moratorium has been viewed well, with rating agencies giving the plan a seal of approval.
With PMC Bank still being in a limbo and Yes Bank provided a capital lifeline by a State Bank of India-led coalition, here's what happened to the other 8
Sikkim Bank Limited (1999)
In March 1999, the RBI imposed a moratorium on Sikkim Bank Limited due to alleged mismanagement and reckless sanctioning of loans, nearly eroding its deposit base of ₹63.7 crores. The bank was merged with the Union Bank of India on December 22, 1999.
Bareilly Corporation Bank (1999)
Again in March 1999, the Bareilly Corporation Bank was put under a moratorium for until it was merged with the Bank of Baroda on June 3, 1999.
Benaras State Bank (2002)
In January 2002, the RBI imposed a moratorium on Benaras State Bank restricting withdrawals to ₹1000 and then to ₹2500. It was a private bank promoted by the titular Maharaja of Benaras. It was merged into the Bank of Baroda on June 20, 2002.
Nedungadi Bank (2003)
Kerala-based Nedungadi Bank was guilty of violating arbitrage norms in stock prices, and was thus put under a moratorium in November 2002. It was merged with the Punjab National Bank with effect from February 1, 2003.
Global Trust Bank (2004)
On July 24, 2004, Global Trust Bank - a new private bank - was placed under a moratorium with about ₹1,500 crores in non-performing assets. Within 48 hours of the moratorium being declared, on July 26, the RBI announced the merger of the bank with the erstwhile Oriental Bank of Commerce, which itself has been merged into the Punjab National Bank.
South Gujarat Local Area Bank (2004)
The bank merged with the Bank of Baroda on June 25, 2004, after the bank got embroiled in instances of cheating and being put under moratorium on November 13, 2003. The bank was a part of a union government plan to encourage local area banks, which never took off.
South India Co-operative Bank (2004)
On August 9, 2004, the RBI imposed restrictions on South India Co-operative Bank headquartered in Mumbai. After a 4-year ordeal, it was merged with Saraswat Bank in 2008, but depositors having more than ₹1 lakh had to take a haircut.
Ganesh Bank of Kurundwad(2006)
The bank saw a moratorium being imposed on it and a merger draft being unveiled, all in a span of two days. On January 7, a moratorium was imposed on the bank due to an adverse capital situation and on January 9, a draft plan to merge it with Kerala-based Federal Bank was unveiled by the RBI. The amalgamation was complete on September 2.
United Western Bank (2006)
The journey of United Western Bank from moratorium to merger was one spanning 10 days. On September 2, the RBI imposed a three-month moratorium on the bank, and on September 12, announced its draft scheme of amalgamating the bank with the Industrial Development Bank of India (IDBI Bank). IDBI bank was able to emerge as a winner among interest from 17 banking entities, according to the RBI.
On March 6 this year, Finance Minister Nirmala Sitharaman went on to cite the alleged botched handling of this merger by the then United Progressive Alliance-government as the cause for the ongoing financial troubles at IDBI Bank. She was defending the moratorium imposed on Yes Bank. "Today if I have problems restoring good health of IDBI, I am giving you good examples of how self-appointed competent doctors had handled UWB merger with IDBI", the finance minister said.
Some banks, like the Lord Krishna Bank and the Bharat Overseas Bank were in dire straits, but were able to merge without the RBI requiring to impose a moratorium on them. In 2007, they were merged with the Centurion Bank of Punjab (later merged with HDFC Bank) and Indian Overseas Bank respectively.
Watch BOOM's interview with Tamal Bandhopadhyay below
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