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“There is no protection, across the world, for money against market investments; misinformation or violation of the rules by the institution,” said R Gandhi, former Deputy Governor, RBI, stressing that normal business risk cannot be ruled out.
In an interview to BusinessLine, he emphasised that small investors must periodically update themselves on financial issues or seek professional advice to understand risk and investments. Excerpts:
In the last one year, retail investors and small depositors are facing problems at institutions like PMC Bank, Yes Bank, DHFL or even Franklin Templeton?
Each one is a different problem; we cannot whitewash them as a single problem. For example, PMC Bank is a depositor problem whereas Yes Bank AT1 bonds are about high-net-worth individuals. By definition, it is HNIs who invest in these instruments; they are not for ordinary investors. Franklin Templeton is a market instrument which is, by definition, risky. It is not meant for small depositors, people have to take a conscious decision based on their risk appetite. So, each issue has to be looked at differently, we cannot treat them equally or think the same set of rules will apply to them.
What are the legal alternatives for these people?
It is a very simplistic position. Any investment, whether it is in bank or market instrument or equity, everything is a risk and the investor is consciously taking it. For depositors, there is some protection available under the DICGC scheme, where the cover has been increased to ₹5 lakh. For exposure beyond ₹5 lakh in a bank, and that bank is in trouble, the recourse for the depositor is to wait for liquidation and liquidated value.
For any misdemeanour and mismanagement by a failing bank, there are certain actions under the Banking Regulation Act by the RBI or even a class of investors. For a market-based instrument, the simple position that you lost money does not automatically mean you will be protected. There is no protection, across the world, for money against market investments, misinformation or violation of rules by the institution. But for the simple fact that somebody has lost money, nobody can claim any compensation.
Will such instances erode the confidence of small investors and depositors?
Not at all. The confidence of depositors is not eroded as they are protected. If somebody expects their money to be completely safe without any loss of investment, then they should keep it in their house, although then also there is some risk of theft. Normal business risk cannot be ruled out. Everything is subject to market risk.
The basic tenet of finance is not to be blindly guided by the return that is promised. Financial literacy is important. In a lot of these cases, most investors, at the time of putting money, were guided by the advice of getting better return and did not look at the fine print and ask questions. If they had asked questions, they would have understood the extra risk. That comes with financial literacy. Periodically, small investors should update themselves on these issues or seek professional advice. There are a lot of programmes and courses available.
How long will these problems take to be addressed? When can investors and depositors get their money back?
It will depend on the type of institution. A bank is different from a mutual fund and NBFC. Each institution will have a different time line for resolution to take place. In the case of banks, DICGC cover is available the moment the bank is liquidated. There is no such insurance for market-linked instruments. In other cases, IBC process and resolution will happen.
Is the increase in DICGC cover sufficient?
Nobody can argue on the right number for insurance. In the US, there is a very high protection of $2.5 lakh. It depends upon the comfort and stage of development within each economy. It took about 30 years to revise the DICGC cover to ₹5 lakh from ₹1 lakh.
Is some of the stress in these organisations due to economic slowdown and problems in the financial sector?
No, I will not link it to problems in the economy. Instances like those at DHFL and PMC Bank are all results of specific misdemeanour by the management. This has nothing to do with the economy. Economic problems can affect anybody, including badly managed institutions. But the management cannot blame such instances on underlying economic challenges.
Franklin Templeton is a different problem; it is not due to mismanagement. I think it is due to professional assessment and selection of instruments for investments having turned out to be wrong. To what extent they could have foreseen this and ring-fenced or mitigated the risk, is a different argument.