Chennai: Commenting on the downfall of the city-based Lakshmi Vilas Bank (LVB) former RBI Deputy Governor R Gandhi has said that wishing banks should not fail is an unrealistic expectation.
Talking to ETV Bharat on RBI’s proposal to amalgamate LVB with DBS Bank India Limited (DBIL) R Gandhi said: “While one can wish that a bank failure should not happen in future, that may not be a realistic expectation and regulation cannot prevent it in every case.”
It may be recalled the Reserve Bank of India on Monday released a draft proposal to amalgamate the 94-year-old private sector lender with the Indian subsidiary of Singapore’s DBS Bank.
The Central Bank also appointed the former Canara Bank Non-Executive Chairman TN Manoharan as the administrator to oversee the amalgamation process.
On the same day, the Ministry of Finance imposed a one-month moratorium limiting the withdrawal limit per customer to Rs 25,000.
Terming the RBI’s swift move would boost the depositor confidence, R Gandhi said: “It's good that RBI acted before erosion in the deposits of LVB. The moratorium and very quick resolution through amalgamation will actually increase depositor confidence.”
Earlier, responding to media queries, TN Manoharan also assured the anxious depositors in the same vein. "Interest of depositors and other customers will be protected, there is no reason to panic," he said.
Moratorium should be the last resort
Pointing out that the moratorium will create long term fear in the minds of depositors, Anil K Sood, Professor at the Institute for Advanced Studies in Complex Choices (IASCC), said: “Moratorium is causing unnecessary panic and uncertainty in the minds of depositors. They are punished for the mistakes of the bank leadership board.”
Problems within the LVB came to the fore last September when a section of shareholders voted out seven of its directors, including MD & CEO as well as promoters KR Pradeep and N Saiprasad. As the bank finances were nosediving, the shareholders were unhappy with the bank’s top management.
Anil K Sood also opined that the RBI should have analysed whether it is a liquidity problem or is it about solvency before announcing the moratorium.
“If the problem was liquidity, RBI should provide contingency liquidity as a long term loan to the banks. If it's a solvency problem, then regulators have to analyse the reason behind the problem. While Non Performing Assets are on the rise across the banks, moratorium should be the last resort,” he added.
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