YES Bank fiasco: RBI asks states not to withdraw funds from private banks

‘We strongly believe that such a move can have banking and financial sector stability implications,’ the letter stated

The Reserve Bank of India (RBI) on Thursday urged the chief secretaries of all states to not withdraw deposits from private sector banks for the sake of financial sector stability, and assured them of the safety of these funds. The government of Maharashtra recently closed one account with Axis Bank, and decided to transfer funds from the private sector to public sector banks. The state government also advised its various departments to not put funds with private sector banks in view of the YES Bank fiasco. A few other state governments are also contemplating similar actions.

“We strongly believe that such a move can have banking and financial sector stability implications,” the letter, signed by RBI Deputy Governor N S Vishwanathan, stated. “We would like to point out that the Reserve Bank has adequate powers to regulate and supervise private sector banks, and by using these powers, it has ensured that the depositors’ money is entirely safe,” Vishwanathan said. Business Standard has reviewed a copy of the letter. The apprehension about the safety of deposits is “highly misplaced” and such a “reactive decision” will not be in the interests of the stability of the financial system in general and the banking system in particular, he said.

The resolution of weak private sector banks in the past has been done in a manner that the “depositors are not put to loss”. In the case of YES Bank too, after the imposition of a moratorium, the RBI drew up a draft scheme “without any delay”, the deputy governor wrote, adding that the central bank was making “every effort to expedite the finalisation of the scheme”.