Banking Act amendment is credit positive for depositors, says Moody's

MUMBAI: The Indian government's amendment to the Banking Regulation Act, which allows the Reserve Bank of India (RBI) to initiate resolution of a weak bank by reconstructing its capital or merging it with another bank without putting it under moratorium is credit positive for the country's depositors, rating agency Moody's said in a report.
Before the amendment, banks which were on the brink of collapse had to be compulsorily be put under moratorium with restrictions on both its depositors and creditors.

Yes Bank was the latest to be put under moratorium on March 5 after it failed to raise capital in time. Depositors could not withdraw more than Rs 50,000 from their accounts. Also, electronic transactions to and from Yes Bank accounts were frozen, causing some borrowers to miss their monthly payments.

Moody's said the new amendments will help depositor confidence.

"The amended resolution process is credit positive because it will help preserve depositor confidence and avoid deposit flight from a weak bank as the risk of a moratorium is reduced. The amendments are also credit positive for the bank's depositors and creditors because their ability to obtain full and timely repayments during the resolution process are unaffected," the rating agency said.

Before the amendments, the RBI could only initiate the resolution process of a weak bank after seeking approval from the Indian government to impose a moratorium on the bank's assets and liabilities for up to six months.

"We regard a moratorium as an event of default, because it prevents a bank from making a full and timely payment to its senior creditors," Moody's said.

Giving the example of Yes Bank the rating agency said though the moratorium on the bank was lifted after 13 days, and its depositors and senior debt holders were rescued, the bank experienced a significant outflow of deposits in the run-up to the moratorium and after it was lifted.

Between December 2019 and March 2020, Yes Bank’s deposits declined by 36%, leading to a sharp deterioration in its liquidity, Moody's said.