RBI Asks State Governments To Avoid Withdrawing Funds From Private Banks

The Reserve Bank of India has advised state governments not to shift their deposits from private sector banks to public sector banks due to fears that private lenders are on a weak footing.

It has come to the RBI's notice that a few states plan to transfer funds parked in private banks to their state-run counterparts following advisories from state government agencies, RBI Deputy Governor NS Vishwanathan said in a letter to state government officials. Vishwanathan, in his letter, assured state governments that the RBI has adequate powers to regulate and supervise private lenders to ensure depositors' money is safe.

BloombergQuint has reviewed a copy of the letter.

Vishwanathan cautioned that a move by state governments to transfer funds out of private banks could have a widespread impact on the country's banking and financial sector stability, he said in the letter. The letter added that the apprehension of depositors and of state government officials, suggesting deposits in private sector banks are not safe, is highly misplaced and reactive.

Vishwanathan said that the RBI has always prioritised depositors' interest to ensure they are not at a loss. Whenever needed, the regulator has stepped in to implement a resolution plan for weak or failing private sector banks.

The deputy governor has urged that state governments reconsider any decision to withdraw their funds or the funds of state agencies deposited with private sector banks and park it with state-run banks.

Last week, the RBI dismissed the board of directors of Yes Bank and appointed an administrator to take care of the bank's operations, after imposing a moratorium on withdrawals and lending activity. In September last year, after being warned about a large hole in financials of the Punjab and Maharashtra Cooperative Bank, the regulator had placed that lender under restrictions as well.

Such instances have spooked large bulk depositors like state governments. Earlier this week, Economic Times reported that Maharashtra had told state departments to park funds in government-owned banks. In October last year, Odisha had issued a similar advisory which was later withdrawn.