The Centre on November 17 placed the Tamil Nadu-based private lender Lakshmi Vilas Bank under a moratorium, capping withdrawals at ₹ 25,000 a month.
The RBI restricted withdrawals by depositors at Rs 25,000 from savings and current accounts, and expenditure on any item at Rs 50,000 per month. However, depositors will be allowed to withdraw more than ₹ 25,000 with permission from the Reserve Bank of India (RBI) for special purposes including medical treatment, payment of higher education and marriage expenses, the ministry said.
The step was taken on the Reserve Bank of India's proposal in view of the private lender's worsening financial health.
The central bank said that in the absence of a proper revival plan, there was no alternative but to impose a moratorium under Section 45 of the Banking Regulation Act, 1949, to protect the interest of its depositors and to ensure financial stability.
The central bank said that the financial health of the bank, which has 563 branches and deposits of Rs 20,973 crore, has "undergone a steady decline with the bank incurring continuous losses over the last three years, eroding its net worth".
Lakshmi Vilas Bank, which required capital urgently due to its deteriorating asset quality, has been struggling to look for a buyer for the past one year. The private lender was reportedly in talks with Clix Capital for capital infusion and a possible merger.
The challenges for the bank began in 2019 when the central bank refused a proposal for its merger with Indiabulls Housing Finance.
Last month, Laksmi Vilas Bank founder, KR Pradeep said that there was no liquidity problem and said that they had a liquidity coverage ratio of 260 per cent as against the required 80 per cent.
In September, the RBI had appointed a three-member committee under banker Meeta Makhan to help the cash-strapped private sector lender, after its shareholders voted out seven of its directors.