Opinion: Lessons For RBI In Silicon Valley Bank Crisis?

On Friday, March 10, 2023, due to a run on the bank by depositors, the Silicon Valley Bank (SVB) in California failed. The same day it was placed under receivership of the Federal Deposit Insurance Corporation (FDIC), which insures all deposits up to $250,000.

On Sunday, March 12, 2023, the US Federal Reserve (US Fed) and the FDIC announced that all deposits would be available to all the SVB customers on Monday, March 13, 2023. The SVB was taken over by the FDIC-owned Silicon Valley Bridge Bank (SVBB).

Now contrast this with what the Reserve Bank of India did when the Punjab & Maharashtra Co-operative Bank Limited (PMC) went bust in September 2019. This may sound like ancient history, but it happened just four years ago. Since then, things have got better - but are they good enough? 

Like the FDIC, we have the Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a 100% subsidiary of the RBI.

At the time of the PMC failure in 2019, deposits up to Rs 1 lakh were insured.

And how did the RBI treat the depositors? To put it mildly, with extreme insensitivity.

During the first six months of the moratorium, they could withdraw only Rs 1,000 (yes, Rs 1,000, if you can believe it!) - later raised to Rs 25,000. No exemptions for emergency medical expenses, weddings, business expenses, expenses related to education.

The RBI subsequently allowed depositors of PMC to withdraw up to Rs 1 lakh by June 2020. So, the depositors got the insured amount of Rs 1 lakh almost one year after the bank went bust. And any amount over Rs 1 lakh was lost forever. Tough for a middle class depositor or a senior citizen living on a pension or a small business that had to close down.

Fast forward to 2020, when RBI got full control over cooperative banks (earlier the supervisory function was shared between the RBI and the state governments) and the DICGC insured amount went up to Rs 5 lakh.

But has the situation improved? I write this article at this time in view of the SVB going bust recently. How long did it take SVB customers to withdraw their deposits?

Exactly ONE working day.

Now let us look at the RBI's and DICGC's very recent actions as of March 3, 2023.

It is fair to say that we cannot expect the RBI and the DICGC to act with the same speed as the US Fed and the FDIC but there has to be some consideration and compassion for the (mostly poor) depositors of cooperative banks.

On Friday, March 3, 2023, exactly one week before the SVB went bust, the RBI asked four cooperative banks to suspend their business and asked the depositors to apply to the DICGC to claim their deposit insurance of up to Rs 5 lakh.

The RBI's press release for the suspension of one of the banks is here. Similar ones for the other banks are available online.

The four banks that were suspended were:

Banaras Mercantile Co-operative Bank Ltd.

Faiz Mercantile Co-Operative Bank Ltd.

Musiri Urban Co-operative Bank Ltd.

Shree Mahalaxmi Mercantile Co-operative Bank Ltd.

Then the DICGC got into the act. It was truly a farce. Just look at a part of its press release.

"2. Depositors of the above bank are advised to submit their deposit insurance claims to the bank. The claims should be supported by officially valid document/s of identity and written consent to receive the amount lying in credit of their deposit (willingness declaration), subject to a maximum of Rs 5 lakh in same capacity and in the same right, along with alternate bank account details into which the said amount will be credited. Please note that the willingness submitted shall be applicable for all deposit accounts held by a depositor in the bank.

3. Depositors submitting valid documents, as mentioned above, will be paid by credit to the alternate bank account specified by depositors, or on their consent, to their Aadhaar linked bank account, subject to bank abiding by the statutory timelines of depositor list submission in terms of Section 18 A (2)."

The press release states that the consent to receive their own money should be provided to their own bank by April 17, 2023 and the money (up to the insured amount of Rs 5 lakh) would be paid by June 1, 2023, i.e. almost THREE MONTHS after their banks were suspended by the RBI. And that amount would be paid into the account of the depositor with another bank.

Why does the depositor need to open an account with another bank with all the bureaucracy involved? Many depositors may be semi-literate and may find it difficult to complete the claim forms or open new accounts with other banks and may fall prey to 'helpful' agents who may agree to help with the paperwork. In many small towns, this may be the only bank. So, what does the depositor do? 

And, during the next three months, how does the depositor live? How does he pay his rent, his food and electricity bills or medical bills? How does he pay his children's school fees? How does he pay his employees and his suppliers if he is running a small business?

There are almost 1,00,000 urban and rural cooperative banks in India.

A large number of these banks are run by political hacks and their surrogates whose main objective is to milk the banks, helped by their poor governance standards. If there are around 1 lakh cooperative banks, many of them poorly run, it is not surprising that quite a few of them fail.

I am no banker but, as only four banks are involved, could the DICGC not immediately put in a Receiver with a small team in place at each of these banks and transfer money from the DICGC to the failed banks to the extent of the insured amounts? Under DICGC supervision, this would enable those depositors who wanted to withdraw their deposits in cash to do so and those who wanted to transfer them to other banks to do so - and without all this paperwork or time limits. While it may not be possible to do this in one day, could it not be done in a week or two?

Also, bear in mind that, as far as those depositors (often small businesses or retired local government servants or pensioners) who had deposits exceeding Rs. 5 lakh, their hard-earned money is lost. That is the price the depositor pays for having an account with a cooperative bank.

This charade has been going on for decades with some improvements, but it is essentially "the bureaucracy first, the depositor last" model.

And if you don't believe me, see how the RBI reacts when a commercial bank is in trouble and the fate of the depositors - both large and small - in commercial banks.

Let us look at the case of the Bank of Rajasthan (BoR). This bank had severe governance problems. In November 2009, the RBI appointed a senior Sate Bank of India (SBI) executive to head the bank. In March 2010, the RBI ordered a special audit of the bank. A couple of months later, the RBI nudged the BoR into an amalgamation with ICICI Bank. No depositor lost a rupee.

In March 2020, when Yes Bank had serious NPA problems (which were apparent to many much earlier), the RBI acted very quickly, and the SBI and a consortium of banks were brought in to stabilise the bank. There was some sort of moratorium for 30 days but then it was all back to normal, and the depositors were safe and had full access to all their deposits.

Or take the Lakshmi Vilas Bank. On November 17, 2021, when the RBI saw no possibility of reviving the bank and protecting depositors' interests, it placed a month long moratorium. During that period, it imposed some limitations on what depositors could withdraw. The same day, the RBI blessed an amalgamation of the bank with DBS Bank and the depositors were totally safe. On November 27, 2021, the moratorium was lifted, and Lakshmi Vilas Bank branches started operations as DBS branches.

And, of course, if a public sector bank is in trouble, the government puts in extra capital to resuscitate it or merges it with another public sector bank. And the depositors are totally safe.

So, when a commercial bank has problems, the depositors are fine with no financial loss. No Rs. 5 lakh DICGC limit for depositors in commercial banks!!

Quite a contrast from what happens when a cooperative bank goes bust and no one is bothered except the depositors. This is what many call: "Socialism for the Rich and Capitalism for the Poor".

Let us stop this shameful travesty. In any fair society, it is unfair to ask the weakest to take the greatest risk and to bear the heaviest financial burden. 

The RBI and the DICGC need to urgently work out some way of paying these customers of failed cooperative banks their deposits rapidly, fully and painlessly.

(Dorab R Sopariwala is Editorial Adviser at NDTV and writes on political and economic issues.)

Disclaimer: These are the personal opinions of the author.