Deepak Parekh, chairman of India’s largest mortgage lender HDFC, has slammed a system that regularly bails out companies and other large entities by loan write-offs and waivers, but is “brutally unfair" when it comes to protecting the common man’s savings. His comments ring true in the context of the massive scam that has rocked the Punjab and Maharashtra Co-operative (PMC) Bank Ltd, leaving its depositors distraught. PMC has admitted that it has exposure of 6,500 crore to realty firm Housing Development and Infrastructure Ltd (HDIL), an overwhelming 73% of its loan book of 8,880 crore. As it turns out, HDIL has allegedly diverted these funds, with PMC in no position to recover its loans. To save PMC from a bank run, the Reserve Bank of India (RBI) had to limit how much money depositors could withdraw.

To keep distrust in banks from spreading, RBI had to ask people at large not to panic. For many, it’s disturbing enough that a bank can actually shut down and vanish with their money. Technically, it’s possible. The government is unlikely to let public sector banks collapse, but what about the rest? Could private banks fail? As the regulator, RBI is expected to keep watch, but this offers no guarantee. A bank is a business at the end of the day. Money kept in one is subject to risks associated with any business.

All that depositors have as protection is deposit insurance of 1 lakh. This is too little, and needs to be raised. Apart from that, the country needs well-defined rules for a resolution process in case a bank turns insolvent. By one proposal, depositors could be treated as financial creditors. This would make sense. And if a bankruptcy is to be resolved by offering them shares in lieu of their deposits, then they should accept it as the best they can get. It would be best, of course, if depositors keep track of the performance of their banks, just as investors do.

Close