Restoring depositor’s faith in banking: Govt’s framework amendment

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Government’s crucial framework amendment to hold up banks’ ratings, by restoring depositors’ faith in banking.

The new amendments will now help to bring back the depositor confidence, said Moody’s. “The Amendments to India’s bank resolution framework are credit positive”, according to Moody’s Investors Service.

“The amendments to India’s bank resolution framework are credit positive, “says Moody’s Investors Service, on 2nd July. This would help the banking sectors to conserve the confidence of the depositors. The Banking Regulation Act, 1948, as amended by the government on June 26th, thereby allowing the Reserve Bank of India to initiate the resolution of a weak bank by integrating it with another bank or rebuilding its capital without the prior requirement of foisting a moratorium on its creditors and depositors.

For the bank’s depositors and creditors, the amendments are credit positive because their ability to obtain full and timely repayments during the resolution process is not affected. As the risk of a moratorium got reduced, it will help preserve the depositor’s confidence and prohibit deposit flight from the weak banks, this makes the amended resolution process credit positive.

Before the amendments, RBI can press a moratorium on a weak bank’s assets and liabilities for up to six months,  only after getting consent from the government, so as to take any action on the resolution process said Moody’s. The banks which were on the verge of collapse had to be strictly be put under moratorium with limitations on both its depositors and creditors before the amendments.”We regard a moratorium as an event of default, as it prevents the bank from making a full and timely payment to its senior creditors,” said Moody’s.

Most recently it was Yes Bank that was put under a moratorium on March 5 after Yes Bank failed to raise capital on time. This brought the depositors to a stage that, they could not withdraw more than Rs 50,000 from their accounts. Also, few borrowers had to miss their monthly payments as the electronic transactions to and from Yes Bank accounts were frozen.

A moratorium was imposed on Yes Bank because of its weakening solvency and liquidity by RBI in March. Although the moratorium disappeared after 14 days, the bank did witness a significant outflow of deposits in the run-up to the moratorium, said the rating agency. The bank’s deposits fell 36 percent leading to a sharp deterioration in its liquidity, between December 2019 and March 2020.

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