RBI's Role in Assuring Financial Stability

The Reserve Bank of India (RBI) has, over the past 25 years, occasionally issued public statements to reassure the financial health of commercial banks and to prevent depositor panic.

Recent Instance: IndusInd Bank

• An accounting error led to a loss of 2.35% of IndusInd Bank's capital, amounting to approximately ₹1,500-2,000 crore.
• This resulted in a stock decline of over 27% in a single day.
• On a subsequent Saturday, RBI issued a statement affirming IndusInd's financial stability and urged depositors not to react to speculative reports.
• The RBI mandated that IndusInd Bank's Board and management complete remedial action within Q4FY25 after making necessary disclosures.
• Key financial indicators as of March 9: 
  • Capital adequacy ratio: 16.46%
  • Provision coverage ratio: 70.2%
  • Liquidity coverage ratio: 113% (above the regulatory requirement of 100%)

Historical Context

• April 12, 2003: RBI reassured ICICI Bank customers amidst liquidity rumors, affirming the bank’s sound financial position.
• March 5, 2020: During the YES Bank moratorium, RBI reassured depositors about the protection of their interests.
• Former RBI Governor Shaktikanta Das emphasized that stock market fluctuations do not equate to the safety of bank deposits, especially during the COVID-19-related market volatility in 2020.

RBI's "Lender of Last Resort" (LOLR) Role

RBI occasionally acts as the LOLR to provide liquidity to banks facing temporary financial difficulties, ensuring depositor interests and preventing broader financial instability.

Historical Reference

Quoting Walter Bagehot’s work, "Lombard Street: A Description of the Money Market," the RBI's deputy governor Michael Patra reiterated the importance of central banks lending freely against good collateral at a penalty rate to avert financial panics.