Who’s Money is it, anyways?

J Mulraj | Updated on September 11, 2020 Published on September 11, 2020

The official attitude towards savers is to treat them as if they were the goose laying golden eggs, and enslaved to their master. Everyone is aware of the disdain shown by banks towards depositors, who provide 90 per cent of the banks’ funding, and simultaneous mollycoddling of shareholders, who provide 10 per cent. Banks find new ways to levy charges on depositors, in order, they say, to serve shareholders!

The fate of depositors of PMC bank is lamentable. It is not, but should be, widely known that once a person gives a bank his money, he no longer owns the money, but the bank does! The depositor is an unsecured creditor to the bank! He ranks almost last in line to claim anything the failed bank may recover.

Assets of defaulting borrowers, when attached, take forever to be sold and even after sale, the proceeds are not distributed to depositors, or victims, but are strangely retained with the investigative agencies. Sometimes, as in the case of NSEL, it is the fraudster who blocks it on a plea that the money invested is ‘benami’ (anonymous) and should not be paid out until verified, and, amazingly, the investigative agencies fall for this! Savers are thus slaves to the system with nary a protection.


Consider a comparison of two banks, IDBI and ICICI. Once both were development banks granting project finance and IDBI was much larger than ICICI. Today the market cap of ICICI Bank is ₹2,57,000 crore, over 6 times IDBI Bank’s ₹40,000 crore. The reason is poor lending by the latter, under Government directive, to ‘favoured’ corporate borrowers, with a high probability of default.

In the past 7 years, IDBI Bank wrote off ₹45,600 crore, and managed to recover only 8 per cent of that. In days of yore, six institutions used to do consortium lending based on a joint appraisal. But after IDBI, IFCI and ICICI converted themselves to commercial banks, each does its own appraisal. Hence the large NPAs and poor recovery of IDBI bank point to dismal appraisal skills. Or directed lending on instructions of policy makers.

Instead of stanching bad lending by IDBI, the Government kept pumping in more money (so also with Air India) and, ultimately, having it ‘rescued’ by LIC. Sorry, but this will only result in, like the proverbial apple, rotting the LIC Basket, and will reduce its valuation. The Government is planning to sell 25 per cent stake in LIC to raise resources hit by the Covid pandemic.

Hit by the burden of Covid’s impact on GST collection on the one hand and China on the other (building up defence capabilities), the Government is unable to meet its commitment to pay States’ share of GST. It is asking States to borrow from RBI to meet their own shortfalls in revenue. It is possible, perhaps, that some states will seek to borrow from the market.

If they do, savers should not be tempted by an interest rate, guaranteed by the State Government, which is higher than bank deposit rates. Remember the let down of investors in Amravati bonds? Issued in August 2018 these bonds offered an interest of 10.3 per cent, investors rushed to subscribe as it was highly rated by rating agencies and guaranteed by the state Government. It was oversubscribed 1.5 times.

What happened next was a rude shock. The Government of Chandrababu Naidu was overthrown in the election and the new Government refused to acknowledge the debt! (How can it?). Savers are slaves, right?

Though listed on the BSE, not a single transaction has taken place. So, basically, investors have been defrauded by a state government with impunity and neither the centre nor SEBI nor RBI has done anything to protect the investors!

This would make it difficult, if not impossible, for State Governments to raise money from investors.

That’s a pity because the market for Municipal Bonds in USA is huge, and local bodies can raise money to fund their shortfalls.

The market is recognising investment opportunities which promise a future (the IPO of Happiest Minds was oversubscribed 150 times) and those whose past behaviour deny a future.

As this column keeps stating, until the Government protects victims of frauds and wrong doings, the savings of people will be misdirected and will, thus, lower economic growth. If we are to spend more on defence against enemies bordering us on many sides, we need good governance and a strong economy. It is way past time to crack down on crooks.


The writer is India Head-Finance, Asia, Haymarket. The views are personal

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Published on September 11, 2020
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