Topic : Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
6. What is a bank moratorium, and when does it come into play? Give examples of how a moratorium can prevent a ‘run’ on the bank? (250 words)
Reference: The Hindu , The Hindu
Why the question:
As the financial ecosystem navigated one more pothole last week, with depositors in Lakshmi Vilas Bank Limited (LVB) getting bailed out, the implications of the Reserve Bank of India’s sleight of hand have got all stakeholders thinking about the way forward.
Key Demand of the question:
One has to explain the concept of Moratorium in banking sector and its applications.
Structure of the answer:
Introduction:
Start by defining what Moratorium is.
Body:
The RBI, the regulatory body overseeing the country’s financial system, has the power to ask the government to have a moratorium placed on a bank’s operations for a specified period of time. Under such a moratorium, depositors will not be able to withdraw funds at will.
Then explain when it comes into play; usually, 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. When a bank’s assets (mainly the value of loans given to borrowers) decline below the level of liabilities (deposits), it is in danger of failing to meet its obligations to depositors.
Present the past experiences of India with respect to Moratorium in the country.
Explain how does a moratorium prevent a ‘run’ on the bank?
Conclusion:
Conclude with its relevance and importance.
