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.
So, what does responsible citizenry mean? It requires creating a calming environment that does not spread rumour and create panic. Rumours spread rapidly in crises and lead to an environment of panic that hurts everyone in the system and ultimately the entire nation. All in positions of responsibility in the economic system need to play this role. This includes people who influence public opinion?like the affected party, media, officials in government and the regulator, competitors, and experts. Responsible citizenry requires that the affected party provides accurate information, transparently as quickly as possible. If it cannot stem the rot by this, its CEO should transparently disclose its financial accounts and get the regulator to certify this. It should not speculate that it is being targeted or being made a victim. No one cares, what people worry about is the safety of their deposits.
The media needs to be responsible too. Sensational stories will quickly spread panic and create a crisis of confidence. It becomes incumbent for the media at times like this to check their story with the regulator. It also becomes prudent for the regulator, at the highest level, to meet with the media and address their story truthfully. It is okay for the regulator to say they do not believe there is any trouble but are continuing to watch the situation closely and will be transparent with the public. Transparency is critical. Regulators should not avoid the media, but media speculation, is harmful.
Likewise, officials working for the regulator or the government need to be careful in what they say. People will call them to check the veracity of rumours as people believe they might be in the know and can guide them. They need to get good information and not loosely say why take a chance?withdraw your money. This creates panic which cannot be controlled later. Industry associations and experts should call for closed door conferences to inform each other and help work through the situation. The government and the regulator must support such responsible conversations. Counter intuitive though it may seem, even competitors don?t gain from their rival?s pain, as panic in the system leads to debilitating contagion. When the world is talking about Mumbai, Shanghai, Dubai or bye bye let us be responsible and not talk irresponsibly and cause needless crisis in India.
The author is managing director, The Boston Consulting Group. These are his personal views