• Central Government has imposed a moratorium on LVB for thirty days in exercise of the powers conferred by section 45 of the Banking Regulation Act, 1949 after considering an application made by the Reserve Bank of India.
• A moratorium is a temporary suspension of activity until future events warrant lifting of the suspension or related issues have been resolved. Moratoriums are often enacted in response to temporary financial hardships.
• This debacle in Indian Banking sector is in continuation with the failure of ILandFS, PMC Bank and Yes Bank that has been going on since the previous 2 years.
Issues with such banks:
• Financial viability: Bank has not been able to raise adequate capital and was also experiencing continuous withdrawal of deposits and low levels of liquidity.
• Poor governance: Most of them do not have strong promoters This has led to deterioration in its performance in recent years.
• A spate of failures has the potential to affect the confidence of depositors and investors. Therefore, the RBI has resorted to merger and infusion of fresh capital to these banks for their resuscitation.
Mains Paper 3: Economy
Prelims level: Bank moratorium
Mains level: Reasons behind moratorium on banks