Spotlight On Reserve Banks Role

The changes in the Reserve Bank of India Act earlier this year to rationalise the supervision of financial firms may reduce the chances of unwary investors getting trapped by a well-established name like CRB Capital Markets downing of shutters.

It is also possible that the rigorous scrutiny ordained under the new act detected the weakness of the company and brought it to heel earlier than would have been possible otherwise. In the alternative scenario, the collapse would have come later but would have brought down with it many more depositors.

But while the RBI may have done right to bring about a BCCI type closure to save future depositors, it will have to do some explaining as to how it at all thought of giving a licence to a company with such unsound foundations.

 

CRB Capital Markets was given an in principle clearance by the RBI to set up a private bank early last year. Only in December was the firm told not to go ahead with its preparation to launch the bank. Naturally, this fact was not broadcast by the company to the public which till last month went on depositing its savings with the company comfortable in the knowledge that it must be a sound organisation. Or else, why should the RBI give it the first step clearance to set up a bank?

What the new law does is to make it compulsory for all non-banking financial companies to seek registration with the RBI by July 8. They can continue to do business unless their applications for registration are rejected. Earlier a company could have carried on the business of taking deposits and lending money without seeking RBI registration, just as CRB Capital did.

In fact, the companys troubles arose when it applied for registration late last year under the new guidelines freeing NBFCs from interest rate and deposit ceilings provided they fully complied with the new guidelines. The RBI ordered a short inspection which revealed that investment norms had not been followed. This led to the ordering of a full inspection and the halt notice on the bank.

After the full inspection report was received the RBI ordered the company not to accept any more deposits and cancelled the in principle clearance for the bank.

This naturally set alarm bells ringing, created a run on deposits, caused cheques to bounce and finally closed the doors.

How did the RBI think of giving

CRB Capital a banking licence, which is the highest recognition of a companys financial stability?

The RBI obviously went by the report of Sebi with which the company is still registered as a category one merchant banker and also the opinions received from CRB Capitals bankers.

The question is whether this was enough.

What more needs determining before selecting prospective licensees for banks from category one merchant bankers with good credit opinions form their bankers?

Banks routinely give these opinions with the clear disclaimer that they are doing so without any risk or responsibility on their part.

The promoter of the firm, C R Bhansali, is a prominent stock broker who had considerable market clout in the past. But that was the past, as we can now see.