Rumours on RBI cancelling licence of a premier private Bank…a tip of the iceberg?

As they say a bank is as good as the next bad rumor..

Following crack down on some bank officials of a leading Indian bank, there were rumors that RBI could cancel the licence of the bank. This was followed by RBI releasing an urgent press release yesterday denying any such move:

The Reserve Bank of India today clarified that it has not initiated any action to cancel the banking licence of Axis Bank in the wake of certain allegations about some serious irregularities in transactions relating to deposit/exchange of Specified Bank Notes in a few branches of the bank. The clarification comes in the background of rumours in a segment of the media that the bank was likely to lose its banking licence.

Even simplest of rumors are enough to pull down a bank, such is the fragile nature of banking. They all look strong till that one rumor hits the bank. The rumor leads to depositors running after the bank to get back their deposits. The bank never has enough money to pay back all its depositors leading to collapse of the bank. So both the bank and regulator are always trying to ensure no such rumors surface. If they do, all attempts are made to quell the rumor. We learnt this in 2008 as well.

However, this could be just a tip of the iceberg. We could see many more of such events.There have been many such reported cases of branches and its managers across the country. AS the dust settles down after Dec 31, the Income Tax and RBI inspection could point to many such cases of laundering and exchange.

In a way, we are seeing a kind of a bank run only where banks are refusing/rationing people their own deposits. Just that banks are getting away with the act as people have been patient and tolerating all the inconveniences so far..

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