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LATEST NEWS UPDATES | When does RBI step in to monitor a bank? -Prashanth Perumal J

When does RBI step in to monitor a bank? -Prashanth Perumal J

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published Published on Oct 23, 2022   modified Modified on Oct 24, 2022

-The Hindu

Why has the Reserve Bank of India increased its oversight on Dhanlaxmi Bank? What are the reasons for the Thrissur-based private bank’s assets to be under stress? According to Basel-III norms, what is the capital to risk ratio a bank is required to maintain? What lies ahead?

The story so far: The Reserve Bank of India (RBI) has placed Dhanlaxmi Bank under tight monitoring with the Thrissur-based private bank’s financial position coming under greater public scrutiny. The RBI’s move comes in the wake of the intense court battle waged by a group of minority shareholders against the bank’s management team over inadequate financial disclosures, rising expenses, and general mismanagement of the business. On Thursday, the bank noted that minority shareholders have called for an extraordinary general meeting next month to decide on restricting the spending powers of the current chief executive officer owing to the deteriorating capital adequacy situation of the bank.

How did it get to this situation? 

Dhanlaxmi Bank’s capital to risk weighted assets ratio (CRAR) dropped to around 13% at the end of March this year from 14.5% a year ago, prompting the RBI to take stock of the financial health of the bank. Under Basel-III norms, which were adopted by financial regulators across the globe in the aftermath of the financial crisis of 2007-08 that involved major failures in the banking system, banks are supposed to maintain their CRAR at 9% or above. The RBI’s move to increase its oversight on Dhanlaxmi Bank is seen as a response to the deterioration in the bank’s capital adequacy. It should be noted that Dhanlaxmi Bank’s capital adequacy has dropped below the stipulated standards in the past and it has even been placed under the prompt corrective action framework (PCA) by the RBI to deal with serious deteriorations in its financial position.

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The Hindu, 23 October, 2022, https://www.thehindu.com/business/Industry/explained-when-does-rbi-step-in-to-monitor-a-bank/article66044567.ece?homepage=true


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