Banking Central | Why Shaktikanta Das is right in cautioning depositors chasing high returns

Reserve Bank of India (RBI) Governor Shaktikanta Das

On December 12, while speaking at an event in New Delhi, Reserve Bank of India (RBI) Governor, Shaktikanta Das cautioned depositors to be careful while chasing higher returns, citing the risks associated with such a pursuit.

“Just because a bank is offering higher interest, the depositors themselves should be very careful before putting in money while chasing such high returns, because usually, our experience is that high returns or high interest rates are associated with higher risks,” Das said.

Chasing higher returns

What Das said was not, in fact, new. Time and again, the regulator has cautioned the public about the dangers of chasing higher returns. But, the reminder this time is even more important, as it comes in the backdrop of a series of recent unfortunate developments.

There have been cases where depositors have been lured by bank executives to invest in high-risk instruments promising higher returns. Also, there are cases where high-value investors moved money to cooperative banks with a shoddy governance track record seeking higher interest.

There are many recent such instances involving cooperative bank depositors and investors in other financial institutions.

A long list of examples

Thousands of depositors who parked their life savings in the Mumbai-based Punjab and Maharashtra Cooperative (PMC Bank) are still waiting to get their money back. The depositors include local businessmen, bankers and HNIs who got lured to the bank as it used to offer relatively higher returns to depositors. Interestingly, the depositors include two RBI employee associations as well.

In April, Moneycontrol reported on how a ‘friendly’ former banker duped a family from Goa and 80 other investors using forged documents. The banker duped HNIs into investing more than Rs 50 crore into his company. He promised them guaranteed returns of 2 percent from derivative instruments such as Index Stock Option Funds. Most of his victims were retirees.

Also, in the Yes Bank AT1 Bond case, several senior citizens were lured by former bank executives to convert their fixed deposits in the bank to AT1 Bonds, introducing these perpetual bonds as ‘Super FDs’.

Cases galore in Kerala

In August, Kerala-based ‘Popular Finance’, a financing firm with a dubious background, went bust. Investigations revealed that a fraud worth almost Rs 2,000 crore was committed by the family that ran Popular Finance. Here again, the depositors were tempted by high returns compared with those offered by formal banking institutions.

There are more such cases. In September 2017, Nirmal Krishna Chit Fund Company, a finance firm based in Palukal in Tamil Nadu and close to the Kerala border, allegedly duped over 13,600 investors from Kerala and Tamil Nadu who had deposited over Rs 500 crore under various schemes promising high returns.

In March 2018, under Operation Kubera, police in Kerala busted several moneylending rackets. According to information shared by the then government, 2,663 cases were registered and 1,577 persons were arrested in the first phase. In 934 cases, a charge-sheet had been filed in courts.

In March, 2019, a chit fund scam was busted in the State when Police arrested one KP Joshy of Nayarambalam, managing director of Trading and Chit Funds Company Limited, for cheating investors for Rs 60 lakh worth of deposits.

Early this year another scam worth Rs16 crore was busted when the State government ordered the assets of the promoters of Thathwamasi Chits and Investments Private Limited attached for cheating investors of about Rs 16 crore.

The list seems endless.

While regulatory lapses, criminal intent, financial mismanagement etc can be blamed, the common factor across the cases is the ‘greed’ of the depositors. Even the regulator is helpless if investors go after dubious institutions, and pour in their money without due diligence in search of quick returns. This pursuit of quick, higher returns invariably leads to economic losses for the depositors/investors.

Das’ warning should be seen in this context.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)