Failure of banks and the plight of depositors

In a country as large and diverse as India, it’s not surprising that banks and banking services, in spite of rapid expansion of the network and adoption of innovative models such as BCs and DSAs in remote areas, have yet not covered 100% of the population. And in spite of soft loans and various government incentivised loan schemes, usurious money lenders in some places are not completely out of business and are meeting exigencies, mostly by extending consumption loans. The benefits behind promoting organised banking are multi fold, though providing relief to poor village folks from the clutches of these blood thirsty usurious money lenders and encouraging habit to save, even if small, in the safe environs of the organised banks outweigh other benefits.

Under the circumstances, it’s most tragic when failure of an organised banking entity – mainly cooperative and private sector- happens due to mismanagement of affairs or other inherent structural weakness and thousands of innocent, poor and needy customers are made to suffer by disallowing them to withdraw their hard earned savings and restricting withdrawals to a small value. The recent enhancement in insurance of deposit by DICGC to Rs5 lakhs is a major reform, but it only reduces the amount of loss and doesn’t come to rescue immediately!

While a government already struggling to meet its obligations under various subsidies may find it extremely tough to guarantee all the deposits across all the banks irrespective of their ownership and structure, the question here is when all the banks are currently subjected to such stern and close supervision by the regulator then it may be worth contemplating whether all the banks can be made fail safe so that no depositor ever loses money kept in a bank or is put to any inconvenience in partially/ fully withdrawing it when in dire straits?

This thought arose in my mind when I read about the prolonged agony being faced by the depositors of PMC Bank since the restrictions imposed by RBI in 2019! Recent enhancement in withdrawal limit and acquisition of its assets and liabilities by Unity Small Finance Bank may be a case of too little too late! On the contrary, swift action was taken when Yes Bank stared at serious trouble and it was pulled out of woods virtually in no time thereby causing minimum of inconvenience to the customers. Can this model be prototyped for all future unfortunate failures of the organised bank ? Can innocent, believing customers afford not to worry about their monies kept in banks? Bit utopian but worth considering!