The Central government on 27th June 2020 brought in significant changes to the Banking Regulation Act by way of an ordinance. It is with reference to RBI and Centre’s mandate to impose a moratorium on banking services when a bank fails or gets into financial troubles.
The ordinance relaxes the requirement to necessarily impose a moratorium for merging or restructuring a failing bank. It means that the regulators can perform financial rescue for banks in financial trouble directly without having to ask the government to impose a moratorium which will in turn enable a softer landing in handling the crisis.
The finance ministry explained the amendments in a press release. The press release stated that the ordinance amends Section 45 of the Banking Regulation Act, to make a scheme for reconstruction or amalgamation of a banking company for protecting the interest of the public, depositors and the banking system and to secure proper management, without having to make an order of moratorium with the purpose of avoiding disruption of the financial system.
The Government brought this amendment after learning from the YES Bank experience.
On 5th March, RBI had imposed a moratorium on YES Bank restricting withdrawals to Rs. 50,000. The moratorium was lifted on 19th March.
A large number of depositors came out to withdraw their money from YES Bank during the moratorium period as a result the bank’s stocks were affected which caused further loss of wealth to the institutional and retail investors.
The changes to Section 45 of the Banking Regulation Act, include – after the word “During the period of the moratorium”, the periods “Or at any other time” shall be inserted, after the words “other creditors” the words “or grant any loans or advances or make investments in any credit instruments” shall be inserted, the words “date of the order of the moratorium” shall be substituted by “reconstruction or amalgamation”.
This presidential ordinance in the matter will come into effect immediately.