Prime Minister Narendra Modi’s government, from the very start of its tenure in 2014, made banking a significant priority, using the Jan Dhan scheme at first in attempt to massively expand the banking network among the unbanked, and then demonetisation – which forced millions of people to deposit their cash into bank accounts, regardless of whether they thought it was a good idea.
Yet today, after five-and-a-half-years in power, there appears to be tremendous anxiety among the Indian public about the banking system.
The plight of the Punjab and Maharashtra Cooperative Bank has contributed to this. After the Reserve Bank of India discovered a massive fraud at place at the bank, it locked down PMC Bank’s reserves. Initially, the Reserve Bank allowed PMC depositors to only withdraw Rs 1,000 over a period of six months, causing tremendous difficulties to those who rely on the bank for their routine expenses.
This amount was eventually increased to Rs 40,000, but even that is little solace for those whose life savings are frozen away. In under 24 hours this week, three account holders at the bank died, two because of heart attacks and one as a result of a suicide. Direct connections between such incidents are of course hard to make and yet the deaths have kept the focus on the regulatory failure at the bank.
Meanwhile, news has emerged that the Reserve Bank of India has stopped printing Rs 2,000 notes. These were introduced in 2016 after Modi’s flagship demonetisation policy move, which turned out to be an economic disaster, causing pain and disruption across the Indian economy, with the many industries still struggling to deal with the fallout.
The report suggested that the central bank has stopped printing the notes because of fears that they are being hoarded by those looking to store black money, the very thing demonetisation was supposed to do in the first place. News like this triggers fears that date back to Modi’s withdrawal of all Rs 500 and Rs 1,000 notes from 2016. It is a common enough joke at this point, laced usually with concern, that whenever the prime minister announces that he is about to address the nation on television, people become worried about whether they need to rush to an ATM.
Fears that banks may collapse and that the government can take your money away at any time can be deadly. After the PMC Bank news emerged, Whatsapp messages about other banks collapsing spread like wildfire, forcing the Reserve Bank of India to reassure the public that they had nothing to be anxious about.
Even as the government is now focused on pulling India out of a dangerous economic slowdown (while some ministers cite movie box office numbers as proof that there isn’t any problem), it needs to work with the Reserve Bank of India to ensure that broader trust in the banking system is not eroded.
This would mean improving the regulatory mechanisms at the central bank, which have very publicly failed on several occasions in the last few years. It also means reassuring citizens that the government is attempting to ensure that depositors will be protected – even if more fraud is detected at other banks, which now seems extremely likely. It would require the government and the RBI to rigorously evaluate potential weak spots in the financial sector instead of simply turning a blind eye and hoping that things will turn out well.