Confidence in financial sector at stake

Topics PMC Bank | ILFS crisis | DHFL

The crisis of confidence in the Indian financial sector seems to be quite serious. The Infrastructure Leasing and Financial Services, Dewan Housing Finance, and more recently, Punjab and Maharashtra Cooperative (PMC) Bank scandals have left people apprehensive  about financial institutions. Even those who have confidence in the system (like myself), run a mental checklist of where they have kept their money to reassure themselves that it is not exposed to unexpected risk. 

Despite being in the investment advisory business and constantly following and writing about the crisis of confidence in the financial sector, somehow it had not become personal to me since neither my clients nor I had any exposure to these entities. Things changed recently. A Non-Resident Indian (NRI) client called to check about his significant exposure to the FCNR deposits of a well-run private sector bank. I ran through the entire gamut of explanations: 

The Reserve Bank of India (RBI) had not allowed any bank (except cooperative) to default on its obligations since 1992. While some private-sector banks have teetered on the edge, they were merged with stronger ones, with depositors not losing any money.  

The client had a deposit in a well-run bank with acceptable non-performing assets and adequate capital adequacy. 

I also compared the fixed deposit rates offered by this bank, which were just marginally higher than that offered by the State Bank of India and HDFC Bank. This indicated that there was market confidence in the bank, and it was not desperately looking for deposits. 

While my client was convinced, I asked him why he was worried. He told me that he had significant deposits in PMC Bank when he was a resident in India. Their branch was close to his house, and it had extended banking hours. After becoming an NRI, he consolidated his bank accounts and closed the PMC Bank account. He still has many friends whose life savings are stuck in PMC Bank. 

 The manner in which the RBI has dealt with the PMC Bank issue does not inspire much confidence. The administrator appointed by the apex bank has been there for more than 45 days now, and yet there is no status report in the public domain. Even the number of depositors affected by the PMC issue (1.6 million) is not officially known. Other pieces of information – whether it is loans extended to HDIL or course of action being proposed or appointment of a forensic auditor – has only come in the media. The blanket of secrecy and absence of deadlines is completely antithetical to how a long drawn out resolution process ought to be run. It almost seems that all authorities are waiting for the issue to blow over. There are plenty of things like the Ayodhya verdict that will displace this bank failure, but the pain of the PMC depositors and the increasing suspicion of depositors towards banks does not bode well for the financial sector.

The writer is a Sebi-registered investment advisor


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