Days after cautioning the state government departments and public agencies against keeping deposits in banks citing concerns about their financial health, the Odisha government has now issued a clarification it does not hold any view on the financial health of any particular bank.

The U-turn by the government of Odisha comes after Reserve Bank of India conveyed its concerns about the government’s advisory which, RBI believed, could have unintended consequences for the stability of the financial system, a person in the know of the communication between the two told CNBC-TV18 on the condition of anonymity.

The contentious circular, issued by the Principal Secretary of Odisha state government on October 21, had cited adverse reports on the fiscal health of banks and limited deposit insurance for cautioning against keeping deposits in any bank.

The circular says that if any state government agencies deposited money in banks, they would have to make a proper inquiry about the health of the bank and take personal responsibility for the same. Further, the government also said that if money was withdrawn from the treasury for state welfare schemes and deposited with banks without sufficient grounds, then it would be treated as “financial irregularity”.

The Reserve Bank of India, in its letter to the Odisha government, stated that it was “deeply concerned” that such a communication had been issued by a responsible public authority and urged the government to take appropriate action for immediate withdrawal or modification of the October 21 circular, the person quoted above said.

Hours after this exchange between the RBI and Odisha government officials, the latter issued a fresh circular stating that the financial health of banks and any view on it was purely in the domain of the RBI. This clarification has been made public on the website of the state government and has been reviewed by CNBC-TV18.

The Odisha government has further said that there is no reason for anyone to get apprehensive about financial health of banks in general. It said that the state finance department has empaneled certain banks for transactions based on bank's performance within State for business with government agencies only. “The circular dated 21.10.2019 was only meant to avoid opening of new accounts by DDOs and shifting of government funds meant for welfare and developmental activities of Government without any reason from one bank to another,” the clarification read.

Further, the circular added that withdrawal of government funds from state treasury, and parking the same with banks for long period without adequate justification should be avoided as it causes loss to exchequer.