Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
A takeover best avoided - Outside View by S.S. TARAPORE

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

A takeover best avoided
Oct 4, 2013

The Financial Sector Legislative Reforms Commission (FSLRC) made a large number of recommendations which will require fundamental changes in the structure of financial legislation. There has been an intense debate between supporters of the recommendations and those who are against them.

The report ostensibly needs to be carefully examined by parliamentary committees before enactment. Notwithstanding this, the Government, as a first step, has proposed that it would take over the ownership of the Deposit Insurance and Credit Guarantee Corporation (DICGC), now under the central bank's control.

This is in line with the FSLRC's contentious recommendation to subsume the DICGC within the proposed Resolution Corporation. The DICGC would take charge of banks and financial institutions in anticipation of failure.

The takeover is erroneously attributed to the Narasimham Committee II (1998), which recommended that a regulator should not be an owner of banks/financial institutions. The Committee certainly did not recommend the takeover of the Reserve Bank of India's (RBI) holdings by the Government.

This perverted logic enabled the Government to take over successively RBI's holdings in the State Bank of India, the National Bank for Agriculture and Rural Development and the National Housing Bank.

These takeovers were highly profitable to the Government as the RBI's profits were routed back to the Government by way of profit transfer. In effect, the Government picked up these lucrative assets for a song.

The present proposal is for the Government to take over the RBI's holdings in the DICGC. But unlike the earlier takeovers, the DICGC would not provide a bonanza to the Government, as all that it would have to offer are large and increasing liabilities.

Ambit of Deposit Insurance

If the Government uses its muscle power to take over DICGC, there must be an explicit agreement, cast in stone, that the RBI would not, at any stage, be required to provide funds to the DICGC or the proposed Resolution Corporation.

At present, the DICGC covers commercial and co-operative banks and is a mere payout agency without any regulatory or supervisory powers. The Jagdish Capoor Working Group (2000) had recommended that there be a differential premia, according to risk, and that the DICGC be empowered to undertake regulation and supervision relating to bank deposits.

The question which has repeatedly come up is whether deposit insurance should be provided to those placing money with financial companies. The uniform response of various committees and working Groups has been that deposit insurance should not cover financial companies.

The FSLRC recommendation, on the other hand, is that the DICGC be subsumed within the proposed Resolution Corporation, which would cover both banks and financial companies. In such a system, it would become imperative to provide deposit insurance to finance companies.

It is true that deposit insurance has been subsumed under a Resolution Agency in a number of countries, but this does not mean that what worked in Ruritania will work in India.

Prior to 1960, there was a proliferation of commercial banks but after the Palai Bank failure, the legislative framework enabled the RBI to impose a moratorium and merge, amalgamate or liquidate banks.

As a result there was a sudden and drastic reduction in the number of commercial banks. Ever since the nationalisation of banks in 1969, private banks facing difficulties were invariably merged with their public sector banks. Since applications for new banks were not entertained, there was a mushrooming of finance companies undertaking quasi-banking functions.

The reptilian growth of finance companies posed a challenge to the sector, which was litigation-prone. These finance companies still continue to remain a big problem. Hence, bank deposit insurance and resolution mechanisms should be kept distinct and separate.

A number of new private sector players are expected to receive bank licences soon. Moreover, a large number of small, new, private sector banks could also emerge. Securing banks should be a top priority and the DICGC should be immediately empowered from within the RBI itself to undertake regulation and supervision of banks in relation to depositor's interests.

At the present time, the depositor is a distant poor cousin in the financial system. It is time that depositors are given their rightful place. One does not tire of repeating the words of the indomitable consumer activist, the late M. R. Pai, who would say that without the depositor there would be no bank.

Careful with reforms

While the Government has opted to initiate action on deposit insurance, it bears emphasising that financial legislative reform should not be undertaken by stealth. Merging bank deposit insurance with a Resolution Corporation dealing with banks and financial companies is a lethal cocktail which can totally destabilise not only the financial system, but Government finances as well.

If the Government is persuaded by the FSLRC activists, all that one can say is: Forgive them, O Lord, for they know not what they do.

The Deposit Insurance and Credit Guarantee Corporation, now under the RBI, should not be taken over by the government. And, it need not cover finance companies.

Please Note: This article was first published in The Hindu Business Line on October 4, 2013.

This column, Maverick View is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Freepress Journal, is titled Common Voice.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "A takeover best avoided". Click here!


More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

Kotak Balanced Advantage Fund: Advantageous For Your Portfolio? (Outside View)

Jul 19, 2018

PersonalFN takes a look at Kotak Balanced Advantage Fund, a New Fund Offer (NFO) from Kotak Mahindra Mutual Fund.

How to Build Affordable Homes in India (Vivek Kaul's Diary)

Jul 19, 2018

Rajiv Talwar, the CEO of DLF, makes a few interesting points in a recent interview.

These Are the Best Stocks for the Next Decade (The 5 Minute Wrapup)

Jul 19, 2018

The start-up eco-system is disrupting each and every sector that we know of. How can Indian investors benefit from this?

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 19, 2018 (Close)