THE BANK MORATORIUM

A moratorium is a temporary suspension of an activity or a waiting period set by a legal authority intended to ease the short-term financial hardship or provide some time to resolve related issues. A moratorium remains until issues that led to moratorium have been resolved. It is the solution to a short-term crisis that disrupts the normal routine of a business.

According to the RBI, the deferred instalments under the moratorium would include the following payments falling due between the said period: a) principal and/or interest components; b) bullet repayments; c) equated monthly instalments (EMIs); d) credit card dues.

A moratorium period is the time during a loan term when the borrower is not required to make any repayment. It is a waiting period before which repayment of EMIs resumes. Education loans provide this feature of moratorium period . This is because education loans are repaid by students after they start earning.

Under the moratorium, depositors will not be able to withdraw funds at will. The RBI has the power to ask the government to have a moratorium placed on a bank’s operations for a specified period of time.

There is a ceiling that limits the amount of money that can be withdrawn by the bank’s customers. In most cases, the regulator allows for funds of a larger quantum to be withdrawn in case of an urgent requirement but only after the depositor provides the required proof.

Often, the moratorium is lifted even before the originally stipulated deadline is reached. As the financial position of a bank deteriorated, the RBI placed it under the Prompt Corrective Action (PCA) framework, which restricts certain operations depending on the severity of financial stress.

It allows time for the bank to find investors to shore up its capital. the RBI steps in if it judges that a bank’s net worth is fast eroding and it may reach a state where it may not be able to repay its depositors.

A moratorium helps prevent a ‘run’ on a bank, by controlling rapid outflow of funds by depositors, who seek to withdraw money in fear of the bank’s collapse. It gives time to the regulator and the acquirer to review actual financial situation at the troubled bank.

The safety of funds depends on whether the struggling bank or the regulator is able to find acquirers or investors to save the day. A moratorium by definition means “to pause” and not to cancel.

The RBI had earlier this year bailed out Yes Bank through a scheme backed by State Bank of India and other banks and recently this scheme is applied to the Laxmi Vilas Bank.

The Reserve Bank of India imposed a 30-day moratorium on struggling Lakshmi Vilas Bank Ltd , superseded its board of directors and announced a draft scheme for the amalgamation of the bank with DBS Bank .