Pro-Active Regulators Must To Protect Pvt Bank Investors: Reddy

Swift action by regulatory bodies and exercising of more caution by public alone would protect the interests of depositors in vulnerable private banks and cooperatives, according to Y V Reddy, the deputy governor of Reserve Bank of India.

His observation gains significance in view of the recent problems plaguing some cooperative banks, particularly the Gujarat-based Madhavapura Cooperative Bank and the Hyderabad-based Krushi Cooperative Bank.

Delivering the first Dr S Radhakrishnan memorial lecture at the University of Hyderabad today, Reddy said, "Depositors in banks should be encouraged to exercise at least as much caution, attention and time when they place deposits as they do when they purchase vegetables."

 

Pointing out that the vulnerability of some of the banks and cooperatives is no longer an impossible contingency, he suggested that, in case of such problem, the regulator should attempt to identify whether it is due to illiquidity or an insolvency problem.

In case it is assessed as an illiquidity problem, the regulator may in exceptional cases act as a lender of last resort and consider infusing temporary liquidity to such a bank to tide over the problem of mismatch, Reddy felt.

If liquidation is necessary, he said, it should be ensured that the retail depositors up to Rs 1 lakh would recover their deposits quickly. He observed that the corporates or institutions that have placed deposits in banks may have vested interest in prolonging the matter even at the cost of small depositors in order to avoid disclosure of losses in their balance sheets.

On Reviving confidence in the Indian Economy, the lecture topic, Reddy said it requires both structural and other cyclically relevant measures. He admitted that the considerable uncertainty arising from turbulence in stock exchanges and apprehensions of liquidity/payment problems, the problems in some cooperative institutions and the largest mutual fund, the downgrading of the rating of a major financial institution have affected investor sentiment.