Sucheta Dalal :Needed a watchdog to restore investor confidence
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal

 

MoneyLife
You are here: Home » Column Topics » Indian Express - Cheques & Balances » Needed a watchdog to restore investor confidence
                       Previous           Next

Needed a watchdog to restore investor confidence  

Aug 16, 2004



 

The events of last week ought to be giving nightmares to India’s policy makers and the banking regulator. The Finance Ministry believes that the Reserve Bank of India (RBI) evokes awe and respect among people, but its credibility has taken a massive beating due to repeated bank failures.

 

The case of Global Trust Bank (GTB), which received a testimonial from the RBI just 10 months before it was placed under moratorium, has been a new low in bank supervision. The Government must remember that ordinary people have no direct interface with the RBI. All they know is that it is responsible for regulating and supervising banks and their failures points to its ineffectiveness.

 

They are also not interested with details such as the divided responsibility for supervising cooperative banks, or why is it that politicians control them all; they are only interested in the safety of their deposits, which the government cannot seem to ensure. In fact, it would be foolish of the Congress-led United Progressive Alliance (UPA) to miss the dangerous dip in bank credibility today.

 

Last week, there was a run on the South Indian Cooperative Bank (an angry depositor calls it the SIC Bank), which is headed by a Congress politician. Instead of worrying about the bank’s financials, Chairman T. Raghavan Sarathy was busy threatening a defamation case against former BJP MP Kirit Somaiya. Somaiya himself is all anger and fury at the collapse of GTB and working hard to find a way to blame the Finance Ministry for leaking inside information.

 

The source of the leak may be some place else, but until the Securities and Exchange Board of India (SEBI) investigates insider trading and interrogates GTB’s promoters, it will give Members of Parliament (MPs) an opportunity to obfuscate real issues.

 

For instance, Somaiya could start by telling us why the BJP failed to initiate action against GTB when it had plenty of opportunity to do it through the Joint Parliamentary Committee of 2001-02, since the management’s dubious dealings had been fully exposed by then.

 

The RBI probably hopes to calm the situation by lifting the moratorium on GTB and allowing it to get back to business. But will it stop jittery depositors from rushing to pull funds out of banks at the first hint of trouble?

 

Last week saw panic withdrawals at Maratha Mandir Cooperative Bank (leading to directions by the RBI), Punjab and Maharashtra Cooperative Bank (probably false panic), it spilled over to South Indian Bank (unconnected with the similar sounding cooperative bank) and for a short while threatened to engulf ICICI Bank again — this time at Hyderabad.

 

Clearly, the situation is extremely volatile. Bank credibility is surely at its nadir when the second largest bank in the country is repeatedly threatened by the irrational panic of its depositors. In future, such public reactions may have far more serious consequences. With soaring inflation and rising interest rates, banks are bound to lose the comfortable profits they made through treasury operations over the last few years.

 

There are also questions about the repayment ability of personal finance borrowers who have long-term loans at the lowest rates. The days of vaulting bank profits are nearing an end and there is a real fear that many banks will have blotches of red on their balance sheets. Unless the government initiates demonstrable measures to tighten bank supervision and to hold the RBI accountable for failed supervision, it could end up with an uncontrollable problem in future.

 

Successive union governments have bleated about the supervision of cooperative banks being in a messy political quagmire, but the argument has no credibility when RBI officials too are never made to pay for frequent failures of supervision. Recent examples include their mess up in supervision of financial service companies, Overseas Corporate Bodies and of course banks. Unlike other independent regulators such as SEBI, the Insurance Regulatory Development Authority (IRDA) and those appointed to various utilities, the RBI is not subject to an audit by the Comptroller and Auditor General and its officials cannot be touched by the Central Vigilance Commission (CVC) or the Central Bureau of Investigation (CBI).

 

This means that all its faults are quietly buried internally. It is no one’s case that the monetary authority of India should entirely be subject to the often ham-handed actions of investigative agencies. On the other hand, there is no reason why bank supervision must remain part of the central bank either.

 

This was discussed and proposed in 1992 after the securities scam when Dr Manmohan Singh was Finance minister. However, all that happened (effectively) was that the Department of Banking Operations and Development (DBOD) was renamed the Department of Supervision (DoS).

 

The present dispensation in Delhi believes that the RBI would be happy to give up responsibility for supervision, but government would want banking supervision to be under an authority that evokes the same awe and respect as the RBI. The government also believes that letting loose the CBI on to the RBI’s supervision department will have no positive benefits, especially since the CBI has an abysmal record of successful convictions. But clearly, the current lack of accountability cannot go on either.

 

The answer may lie in an apex watchdog body for financial services like the Financial Services Authority (FSA) of UK whose aim is ‘‘to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal’’. The FSA is an independent non-governmental body with statutory powers and covers banks, insurance, capital markets, deposit takers and investment companies and all kinds of financial fraud and crime including insider trading and money laundering.

 

Interestingly, Finance Minister P. Chidambaram had apparently proposed an FSA type institution during his previous stint at the Ministry. An FSA like institution, which covers all deposit-taking entities, could also eliminate the joint supervision of cooperative banks and their politicisation. Clearly, it’s time to clear over five years of dust from that proposal and find a way to implement its suggestions quickly, before bank performances increase the nervousness of investors and depositors.

 

[email protected] 

 

http://www.indianexpress.com/full_story.php?content_id=53134


-- Sucheta Dalal



 



Recent Comments