The paramount task of financial institutions or financial intermediaries is to mobilise savings of the community and ensure efficient allocation of these resources for productive investment. The financial institutions that garner deposits from the public, namely commercial banks, co-operative banks, deposit-taking NBFCs, and housing finance companies are regulated entities.
The Deposit Insurance and Credit Guarantee Corporation of India (DICGCI) has been in existence since 1961 and has been serving the role of safety net for banks. After the crash of the Palai Central Bank Ltd (Kerala) in 1960, the RBI and GoI passed the Deposit Insurance Corporation (DIC) Act in 1961. According to this Act, deposit insurance is mandatory for all banks in the country. Therefore, all commercial banks, including small finance banks, payments banks, branches of foreign banks functioning in India, local area banks, regional rural banks, all state, central and Primary Cooperative Banks (Urban Cooperative Banks) are registered and covered by the DICGC. At present, there are 2,098 banks, of which 1,941 are co-operative banks registered with deposit insurance cover. Each depositor in a bank is insured up to a maximum of Rs 1 lakh of deposits.
In India, there are about 128 deposit-taking Non-Banking Financial Companies (NBFCs) registered with RBI. Certain restrictions have been imposed on them: An NBFC cannot accept demand deposits; an NBFC is not part of the payment and settlement system and as such cannot issue cheques drawn on itself; deposits accepted by NBFCs are not covered by deposit insurance of DICGCI.
Many a time, gullible and uninformed depositors in search of attractive returns fall prey to bodies that are unregistered and unregulated. History shows that these unincorporated entities squirrel away hard-earned funds of small depositors. Taking advantage of the information asymmetry, these entities change their name, constitution, ownership or relocate the place of business. Ultimately, the fly-by-night operators devour the savings of depositors, causing immense harm to individuals, families and society at large. This undue enrichment at the cost of the poor is obnoxious and unethical, and needs to be curbed; depositors’ interests must be protected.
Significantly, a task force on NBFCs being chaired by CM Vasudev, was constituted by the Government of India in late Nineties, and the body recommended that unauthorised deposit-taking by unincorporated financial intermediaries should be made cognisable offence and the state governments should frame suitable legislation to curb such malpractice on the lines of Tamil Nadu Protection of Interests of Depositors (Financial Establishments) Act, 1997. The pioneering Tamil Nadu Act provides stern action against financial establishments that fail to pay depositors back; by setting up of a special court for speedy trial, attachment of and sale of properties and for recovery and payment of dues to the depositors. The offence is compoundable, and this provision was introduced in 2003 so that the financial establishments would come forward to settle the amounts due to the depositors, expeditiously.
Financial Establishments for this purpose includes any person, association of persons, a firm, a company accepting deposits under any scheme but does not include co-operative societies owned, controlled by any state government or bank regulated by the RBI. In the event of default by financial establishments, enforcement machinery should proactively attach the property and distribute the proceeds to the depositors.
In line with the developments mentioned, the ‘Orissa Protection of Interest of Depositors (Financial Establishment) Bill, 2011’, was passed by the state. The Act provides much-needed legal backing to the government, to curb the menace of fraudulent financial entities in the state, that are illegally collecting deposits.
In a significant development for protection of depositors’ interest, the Government of India has passed the Banning of Unregulated Deposit Scheme, 2019 (21 of 2019), July 31, 2019. The preamble says it is “an Act to provide for a comprehensive mechanism to ban unregulated deposit schemes, other than deposits taken in the ordinary course of business, and to protect the interest of depositors and for matters connected therewith or incidental thereto.”
The Act defines a “deposit taker” as: Any individual or group of individuals; proprietary concern; Partnership firm; limited liability partnership; trust, co-operative society or multi state co-operative societies.
Significantly, deposit schemes operated by jewellers will be illegal. However, small businesses taking deposits from friends and relatives are not covered under the Act. The Act prescribes that the state government shall make rules for carrying out provisions therein.
RBI, launched the website SACHET (https://sachet.rbi.org.in/) to monitor unauthorised deposit taking. The portal was launched in 2016 by Dr Raghuram Rajan to enable the depositors and investors to report unauthorised collection of deposits or Ponzi schemes promptly. Depositors can file complaints on the website before the State Level Co-ordination Committee, which comprises members from regulators namely the RBI, SEBI, IRDA and Economics Offences Wing of the government as its members for corrective action.
Financial literacy should be recognised as a vehicle for development strategy. The annual policy statement, 2013-14 of the RBI, says: “The triad of financial inclusion, financial literacy and consumer protection have been recognised as intertwining threads in the pursuits of financial stability.”
It serves as a safety valve and ultimately safeguards the interest of depositors. The states may create a dedicated body to undertake awareness and financial education drives among the public about the various deposit accepting financial entities, various deposit schemes, chit funds, applicability/non-applicability of deposit insurance, grievance re dressal by banking ombudsman and SACHET scheme. On the downside, the lack of safeguards to financial savings may compel investors to place their disposable funds in unproductive assets (gold, land and cryptocurrency), which adds little value to the economy.
The writer is a former central banker.
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