Yes Bank crisis: RBI cautions state governments from withdrawing deposits from private banks

The Reserve Bank of India (RBI) has written a letter to the chief secretaries of all states, warning them of the implications of shifting bank deposits from private to public sector banks.

In a letter penned by outgoing deputy governor NS Vishwanathan, RBI has requested state governments to reconsider any decision to withdraw funds from private banks, as "such a reactive decision will not be in the interest of stability of the financial system in general, and the banking system in particular".

CNBC-TV18 has reviewed this letter written by RBI.

Deputy governor Vishwanathan starts the letter by saying that RBI had observed through media reports that some of the state governments had advised their government bodies and entities under their jurisdiction to transfer funds from private sector banks to public sector banks and that some other state comes were also contemplating similar action.

"We strongly believe that such a move can have banking and financial sector stability implications," the letter read, adding that the central bank has enough powers to regulate and supervise private sector banks.

"It is pertinent to mention that 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 precise 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, the RBI has drawn up a draft scheme without any delay, and we are making every effort to expedite the finalisation of the scheme."

The letter comes after several reports had suggested that in the fallout of the Yes Bank crisis, which recently saw RBI imposing a moratorium on the bank and restricting withdrawals by depositors, state governments like Maharashtra were considering moving deposits to public banks.

Ajoy Mehta, chief secretary of Maharashtra, was quoted in reports saying, "We have already issued an order asking for all departments and civic bodies to not have deposits in private banks but in nationalised banks."