Restoring Trust in the Institutional SystemThis time around, one is afraid, the inept handling of PMC Bank mess is the last straw that has triggered another round of gossips by doomsayers who enjoy spreading negativism, just for the sake of remaining in the media glare.There’s no denying that there’ll be one more visible scar on the trust people had in the Indian Banking System since the 1960’s. With the nationalization of major commercial banks (1969) and extension of coverage of the Banking Regulation Act to cooperatives (1966), a common man believed that someone is in control of the banks in India and his savings deposited in banks were safe.Obviously, the action initiated by RBI imposing restrictions in the functioning of the PMC Bank is with good intentions and aimed at protecting the interests of bank’s depositors. One objective of imposing a ceiling on withdrawal from a deposit account with the bank is to guard against panic withdrawals which may cause a run on the bank. Fair enough. The initial ceiling on withdrawal of Rs1000 during the 6 months (since revised in stages to ₹50,000), possibly the result of a ‘cut and paste’ approach to drafting directions invited a panic response. More transparency in such measures is needed, as today, the public trust in the financial system is not very high. The inadvertent efforts to destabilize the institutional system including the limbs responsible for regulation and supervision have also contributed to the present unhappy situation. The laws applicable to primary (urban) cooperative banks with multi-state presence and the large clientele need an immediate overhaul. “Cooperatives” remaining a state subject should not come in the way of regulating cooperative banks under the provisions of B R Act.A related issue is, for the savers, the statutory provisions stipulating capital and reserves requirements including maintenance of liquid assets and the existence of deposit insurance (with a ridiculously low limit of Rs one lakh per account fixed decades ago) are not found helpful in such situations. In this context, just as RBI has got it’s Economic Capital Framework (ECF) studied by an expert group chaired by former RBI governor Dr Bimal Jalan, GOI and RBI may consider appointing a panel of experts to study the capital and reserves framework of all banks including cooperative banks. The expert panel may also make suggestions on maintaining a national deposits protection fund under the aegis of DICGC to provide immediate relief to depositors in situations like this. A wholesale review covering adequacy of capital, liquid assets and reserves and realignment of their components may prove beneficial to the economy, as the exercise may release liquidity into the market.A related issue: Resources managementWhile it is comforting to see that RBI has denied rumours about the sale of gold reserves and is really augmenting the gold component in India’s foreign exchange reserves, efforts to account and mainstream the country’s domestic gold stock is not moving fast. There is urgency in doing this as the measure will bring down the need to import gold which is a drain on our precious forex reserves.According to media reports, soon after PM’s visit, Guruvayur temple (Kerala) decided to deposit 350 kg out of its gold stock with State Bank of India which deposit will earn about 8.75 kg gold per annum as interest for the Devaswam. Surprisingly, the gold had to be transported all the way to Mumbai for refining and standardizing for being accepted as deposit by SBI. Earlier also the temple had deposited gold with the bank. Other temples like Tirupati and Siddhivinayaka (Mumbai) also have deposited part of their gold stocks with banks. Reportedly, one single deposit of Tirupati earns interest equivalent to the value of 80 kg gold per annum.To make gold deposit schemes popular, measures, like starting facilities for refining and certification of standard, building public trust in such schemes and incentives for accounting and mainstreaming gold stocks beyond a threshold level with institutions and individuals, may be necessary. How far certain ceilings for household gold possessions indicated in 2016 by Centre, is anybody’s guess.Financial sector stability, a mirage?The mess in the Indian Financial System created by a triumvirate of banks/UCBs, shadow banks and realty firms has reached a melting point thanks to the overconfidence of those who were at the helm of PMC Bank, headquartered in country’s financial capital, who assumed eternal immunity from legal provisions.Since 1966 when some provisions of the Banking Regulation Act, 1949 were made applicable to cooperative societies, many of the cooperatives which used ‘bank’ in their name legally and illegally are being owned and operated by certain vested interests for mobilisation of deposits and diverting the resources mobilized for purposes of their choice. The result, public trust in the banking system takes a hit.The common man in his capacity as a saver who deposits money in any bank in India may be concerned with the following issues:· There is a Deposit Insurance and Credit Guarantee Corporation providing an insurance cover of up to Rs one lakh per account-holder. It is not providing any timely support when account-holders who had balances in current and savings accounts in banks like PMC Bank are told that their deposits were frozen indefinitely and arbitrary ceilings are fixed for the maximum amount that can be withdrawn from deposit accounts.· What is the role the Registrar of Cooperative Societies as the authority having control over administrative matters of the bank will play in such situations?· To what extent the stipulations and monitoring of maintenance of cash reserves (under RBI Act or BR Act) and Statutory Liquidity Reserves (under B R Act) will safeguard the interests of stakeholders in such situations?One feels uncomfortable when none of the safeguards and safety-valves works in an emergency. No, we cannot just blame the judiciary, statutory bodies or institutions for the chaos and forget this till next calamity happens. Somewhere a beginning has to be made. Let it be from PMC Bank experience.PMC Bank has over ₹10,000 crores collected as deposits from thousands of depositors spread in 6 or 7 states. That calls for GOI intervention. GOI, RBI and representatives of some state governments should sit together and analyze what went wrong in this case. If necessary, new laws should be enacted. If amendments will take care, they should be carried out. The purpose should be to make adequate recoveries to pay the depositors in full. After that, let the PMC Bank start afresh if it wants to continue in business.