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BACKGROUND

The financial position of The Lakshmi Vilas Bank Ltd. (the bank) has undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net-worth.

In absence of any viable strategic plan, declining advances and mounting non-performing assets (NPAs), the losses are expected to continue. The bank has not been able to raise adequate capital to address issues around its negative net-worth and continuing losses. Further, the bank is also experiencing the continuous withdrawal of deposits and low levels of liquidity. It has also experienced serious governance issues and practices in recent years which have led to the deterioration in its performance. The bank was placed under the Prompt Corrective Action (PCA) framework in September 2019 considering the breach of PCA thresholds as on March 31, 2019.

REVIVAL EFFORTS

The Reserve Bank had been continually engaging with the bank’s management to find ways to augment the capital funds to comply with the capital adequacy norms. The bank management had indicated to the Reserve Bank that it was in talks with certain investors. However, it failed to submit any concrete proposal to Reserve Bank and the bank’s efforts to enhance its capital through the amalgamation of a Non-Banking Financial Company (NBFC) with itself appears to have reached a dead end. As such, the bank-led efforts through market mechanisms have not fructified. As bank-led and market-led revival efforts are a preferred option over a regulatory resolution, the Reserve Bank had made all possible efforts to facilitate such a process and gave enough opportunities to the bank’s management to draw up a credible revival plan, or an amalgamation scheme, which did not materialise. In the meantime, the bank was facing regular outflow of liquidity.

MORATORIUM

After taking into consideration these developments, the Reserve Bank has come to the conclusion that in the absence of a credible revival plan, with a view to protecting depositors’ interest and in the interest of financial and banking stability, there is no alternative but to apply to the Central Government for imposing a moratorium under Section 45 of the Banking Regulation Act, 1949. Accordingly, after considering the Reserve Bank’s request, the Central Government has imposed moratorium for thirty days effective.

ASSURANCE TO THE DEPOSITORS

The Reserve Bank assures the depositors of the bank that their interest will be fully protected and there is no need to panic. In terms of the provisions of the Banking Regulation Act, the Reserve Bank has drawn up a scheme for the bank’s amalgamation with another banking company. With the approval of the Central Government, the Reserve Bank will endeavour to put the Scheme in place well before the expiry of the moratorium and thereby ensure that the depositors are not put to undue hardship or inconvenience for a period of time longer than what is absolutely necessary.

The Reserve Bank has also issued certain directions to the bank under section 35 A of the Act ibid.


Reserve Bank of India

[Dt. 17-11-2020]

Legislation UpdatesStatutes/Bills/Ordinances

The Banking Regulation (Amendment) Bill, 2020

Which Act will the said bill amend?

The Banking Regulation (Amendment) Bill, 2020 will amend the Banking Regulation Act, 1949 and the Act will be called the Banking Regulation (Amendment) Act, 2020.

Why were amendments needed under the Banking Regulation Act, 1949?

Certain amendments were considered necessary in the said Act to provide for better management and proper regulation of co-operative banks and to ensure that the affairs of the co-operative banks are conducted in a manner that protects the interests of the depositors, by increasing professionalism, enabling access to capital, improving governance and ensuring sound banking through the Reserve Bank of India.

Further amendments were proposed to be made in Section 45 of the Act to enable the Reserve Bank of India to make a scheme to protect the interests of the public, the banking system, depositors or to secure the banking company’s proper management, without first making an order of moratorium so as to avoid disruptions in the financial system

How did COVID-19 impact the economic situation?

As the economic situation arising from the COVID-19 pandemic had increased the stress in both co-operative banks and banking companies, there was an immediate need for legislation in this regard.

As Parliament was not in session, the Banking Regulation (Amendment) Ordinance, 2020 was promulgated by the President of India on the 26th day of June, 2020 under clause (1) of Article 123 of the Constitution.

Salient Features of the Bill:

(i) substitution of Section 3 to provide that the Act shall not apply to— (a) a primary agricultural credit society; or (b) a co-operative society whose primary object and principal business is providing of long term finance for agricultural development if such society does not use as part of its name, or in connection with its business, the words “bank”, “banker” or “banking” and does not act as drawee of cheques;

(ii) Amendment of Section 45 to address the potential disruptions in the financial system by providing for the Reserve Bank of India to prepare a scheme for the reconstruction or amalgamation of the banking company without the necessity of first making an order of moratorium;

(iii) Amendment of Section 56 to provide that notwithstanding anything contained in any other law for the time being in force, the provisions of the Act shall apply to co-operative societies, subject to the modifications specified therein

Read the detailed bill, here: BILL

The Banking Regulation (Amendment) Bill, 2020 was passed in Lok Sabha on 16-09-2020.


Lok Sabha

Legislation UpdatesStatutes/Bills/Ordinances

In pursuance of the commitment to ensure safety of depositors across banks, the President has promulgated the Banking Regulation (Amendment) Ordinance, 2020(Click to view the Gazette notification on the Ordinance)

The Ordinance amends the Banking Regulation Act, 1949 as applicable to Cooperative Banks. The Ordinance seeks to protect the interests of depositors and strengthen cooperative banks by improving governance and oversight by extending powers already available with RBI in respect of other banks to Co-operative Banks as well for sound banking regulation, and by ensuring professionalism and enabling their access to capital. The amendments do not affect existing powers of the State Registrars of Co-operative Societies under state co-operative laws. The amendments do not apply to Primary Agricultural Credit Societies (PACS) or co-operative societies whose primary object and principal business is long-term finance for agricultural development, and which do not use the word “bank” or “banker” or “banking” and do not act as drawees of cheques.

The Ordinance also amends Section 45 of the Banking Regulation Act, to enable making of a scheme of reconstruction or amalgamation of a banking company for protecting the interest of the public, depositors and the banking system and for securing its proper management, even without making an order of moratorium, so as to avoid disruption of the financial system.


Ministry of Finance

[Press Release dt. 27-06-2020]

[Source: PIB]