Column : Responsibility, not rumour

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: The world is going through turbulent times. Times our generation has not witnessed. India may not be the nerve centre of the crisis and in the broader perspective may not be hit as hard as the rest of the world. However, it is still a time that requires a mix of caution, pragmatism and confidence. What is not at all useful for us in these times is rumour mongering that causes panic in our system, especially our

financial system. We all know that a

financial system is built on trust and confidence. A bank can intermediate between borrowers and lenders only because of confidence in its ability to meet its depositor’s demands. The world over “commercial banking” (those that can accept retail deposits) are therefore regulated and in fact deposits to a certain extent are insured by a deposit insurance company (DICGC in India). Regulators also force a bank to hold a certain capital and inspect their accounts to ensure the quality of their books and in return allow them the ability to borrow from the central bank. Due to its very intermediary nature no bank however strong can withstand a run on its deposits—because it cannot at short notice call in its advances and investments.

If it fails though, there is a domino effect that affects all parts of the economy. Thus a banking system is a public good. At times of crisis therefore there is a need for responsible citizenry. What we witness in India today unfortunately is its absence—witness the rumours causing a run on a specific bank. This is bad for the overall system not for the single player.