If states like PSBs, that’s OK PDF Print E-mail
Monday, 16 March 2020 03:40
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If they feel private banks are risky, that’s also legitimate


If state governments decide to, en masse, start withdrawing deposits from private sector banks, as many seem to want to after the Yes Bank debacle, there can be little doubt that this will hit these banks. It is not surprising, then, that RBI has urged state governments not to desert private sector banks. “We strongly believe,” RBI deputy governor NS Vishwanathan stated in a letter to various state governments, “that such a move can have banking and financial sector stability implications”. The RBI deputy governor has sought to assuage the states’ concerns by saying, “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”.

Nor is this entirely loose talk. Most private banks that have been on the verge of failure have been merged with stronger banks in the past to protect depositor interests, and, in the case of Yes Bank, between the government and RBI, enough public and private sector banks—led by SBI—have contributed to shoring up its equity to ensure deposit-holders are able to exit without a problem. But, while RBI and the government have done well to put together a consortium of banks to bail out Yes Bank, whether this works fully is yet to be seen. It will be seen to have worked only after all depositors are able to exit in case they wish to; though the massive show of strength RBI has put together is to dissuade depositors from doing so.

While RBI has managed this in the case of Yes Bank, state governments and others are well within their rights to ask whether RBI can do this for all banks, and for all time to come. And, if RBI can’t, surely the state governments are morally responsible for shifting out their money to safer banks? Indeed, while RBI can claim it has ensured Yes Bank didn’t collapse, the fact is that it was under RBI’s watch that things came to this pass. That it was RBI that ensured the founder was eased out, and that a new professional was given adequate time to find a solution may be creditable, but it doesn’t take away from the fact that RBI isn’t as all-powerful as it is trying to claim. Indeed, by seeming to suggest that all private banks are safe, the central bank is doing itself a disservice in the long run. Indeed, if that were true, the government should have extended deposit insurance to the entire amount deposited—instead of just up to Rs 5 lakh—since, with RBI ensuring no banks fail, the insurance premium would be very low. If depositors feel private banks are riskier, there is little the central bank can—or should—do to fix this. Indeed, the belief that all public sector banks are fully safe is equally problematic, though it is not RBI’s job to point that out either.


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