RBI cautions state govts as Maharashtra govt closes Axis Bank account

In a move that could worsen an already difficult situation for banks and non-banking financial institutions in the country, Maharashtra government has closed its account with private sector Axis Bank following the Yes Bank fiasco that left depositors, including corporate, mutual funds and individuals and even some state governments in the lurch.  

The state government’s decision, however, is seen as an over-reaction to a crisis, which only helps to deepen the crisis. 
Reacting to Maharashtra government’s decision to withdraw its deposits from Axis bank, Reserve Bank of India (RBI) asked state governments not to transfer their money out of private sector banks as it will affect the financial stability of the country.
“Apprehensions about the safety of deposits in private lenders are highly misplaced,” RBI wrote in its letter to all state governments.
“Moving deposits out of private sector banks could have implications for banking and financial sector stability,” RBI said in a letter written to chief secretaries of all states.
The letter came after reports suggested that some state governments have advised government bodies and other entities under their jurisdiction to transfer their funds held with private sector banks to public sector lenders. This follows the crisis at Yes Bank where the RBI has superseded the bank’s board and placed restrictions on withdrawals.
“We strongly believe that such a move can have banking and financial sector stability implications,” the RBI wrote. “We feel that apprehension on the safety of deposits in private sector banks is highly misplaced and will not be in the interest of stability of the financial system in general and the banking system in particular.”
RBI has requested state governments to reconsider any decision they might have taken in this regard or are in the process of taking such a decision.
“The Reserve Bank has adequate powers to regulate and supervise the private sector banks and by using these powers, it has ensured that the depositors’ money is entirely safe,” the letter said.
The RBI said the resolution of weak private sector banks in the past has been done in a manner that the depositors are not put to loss.
“It is precisely with a view to retaining depositors’ confidence in private sector banks and mitigating their hardship that, after the imposition of a moratorium on Yes Bank Ltd, the RBI has drawn up a draft scheme without any delay and we are making every effort to expedite the finalisation of the scheme,” it added.