Small depositors in all countries are exposed to higher risk. As the banks are well regulated, the risk to depositors is mitigated to a limited extent through deposit insurance. In India, 87 commercial banks, 82 Regional rural Banks, 4 Local Area Banks and 2026 Co-operative banks are covered by deposit insurance scheme of the Deposit Insurance and Credit Guarantee Corporation of India (DICGCI). Each depositor in a bank is insured up to a maximum of rupees one lakh for both principal and interest. In the aftermath of Global Financial Crisis, depositor protection has become far more central for achieving the goal of financial stability

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Protecting Small Depositors
INDIAN EXPERIENCE
F Schumacher’s book Small is Beautiful ranks among the 100 most
influential books written since the World War II. Published in 1973, it
puts emphasis on appropriate small technologies and the force of
decentralization, in the factories. Although it did not discuss much about the
services sector, in the present era of economic empowerment, the small depositors
deserve attention as their small savings can be pooled for better social purpose.
Small depositors in all countries are exposed to higher risk. As the banks are well
regulated, the risk to depositors is mitigated to a limited extent through deposit
insurance. In India, 87 commercial banks, 82 Regional rural Banks, 4 Local Area
Banks and 2026 Co-operative banks are covered by deposit insurance scheme of the
Deposit Insurance and Credit Guarantee Corporation of India (DICGCI). Each
depositor in a bank is insured up to a maximum of rupees one lakh for both
principal and interest. In the aftermath of Global Financial Crisis, depositor
protection has become far more central for achieving the goal of financial stability.
In our country, gullible and un- informed depositors in search of attractive returns
fall prey to the bodies that are unregistered and unregulated. History shows that
these unincorporated entities squirrel away hard earned funds of the small
depositors. Taking advantage of the weakness of the system, and information
asymmetry these entities change their name, constitution, ownership or relocate the
place of business. Ultimately, the fly-by- night operators devour the savings of
depositors, causing immense harm to individuals, families and society at large. This
undue enrichment at the cost of poor and obnoxious and unethical activity needs to
be curbed and depositors’ interest must be protected.
The Task Force on NBFCs ( Chairman: C.M. Vasudev) constituted by the
Government of India in late nineties recommended that the offences of
unauthorized deposit- taking by unincorporated financial intermediaries should be
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made cognizable offence and the state governments should frame suitable
legislation to curb such malpractice, on the lines of Tamil Nadu Protection of
Interests of Depositors ( Financial Establishments) Act, 1997. The pioneering
Tamil Nadu Act provides stern action against financial establishments who fails to
pay back to depositors; by setting up of a Special Court for speedy trial, attachment
of and sale of properties and for recovery and payment of dues to the depositors.
The offence is compoundable and this provision was introduced in 2003 so that the
financial establishments would come forward to settle the amounts due to the
depositors, expeditiously. As far back as in 2000, RBI advised all the State
Governments and Union Territories to pass suitable legislation on the line of Tamil
Nadu Act. Most of the States/ Union Territories viz Andhra Pradesh, Bihar, Gujarat,
Karnataka, Maharashtra, Madhya Pradesh, Delhi, Goa, Tripura have enacted such
legislation.
Nevertheless, the constitutional validity of the Tamil Nadu Act was challenged
before the High Court, Madras. It was also contended that the Act was arbitrary and
violative of Article 14, 19 (1) and 21 of the Constitution. The Full Bench of the
Madras High Court had upheld constitutional validity of the Act. Against the
judgment, an appeal was preferred by one K.K. Baskaran, before the Supreme
Court. In March 2011, Supreme Court gave a landmark judgment according to
which States are competent to pass such laws in the interest of depositors.
According to the apex court, this is a step in right direction and constitutionally
valid.
With the Supreme Court judgment, the State Governments can pass legislation to
protect the interests of the depositors in financial establishments. Financial
Establishments for this purpose includes any person, association of persons, a firm,
a company accepting deposits under any scheme but does not include co-operative
societies owned, controlled by any State Government or banks regulated by RBI. In
the event of default by the financial establishments, enforcement machinery should
proactively attach the property and distribute the proceeds to the depositors. It may

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be noted that the deposits mobilized by such bodies are not covered under deposit
insurance scheme of DICGCI.
The states that have not enacted similar Acts should take quick steps to undertake
suitable legislation drawing best practices from other states. In December 2011,
“Orissa Protection of Interest of Depositors ( Financial Establishment) Bill, 2011”,
was passed by the state legislature and was sent to the Union Home Ministry in
April 2012 for the presidential assent. The State Government must be congratulated
for piloting such a public-friendly bill. The proposed Act would give the much
needed legal backing to the Government to curb the menace of escalating
malpractices of fraudulent financial entities in the state, illegally collecting deposits.
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Way Forward
 The state legislation must exclude the NBFCs which are registered with Reserve
Bank of India, and Housing Finance Companies regulated with National Housing
Bank,( NHB) so that the state machinery can focus on the financial
establishments so far not covered under any law.
 In certain states Ponzi Schemes floated by unscrupulous elements have siphoned
off huge amount of money from the public. As these are not regulated activity,
state governments should be vigilant and curb such activity.
 The recent episodes in West Bengal and Odisha show that the financially
illiterate persons are not aware of the implications of placing their funds with
unregulated entities.
 Financial literacy can bridge the knowledge gap. The Annual Policy statement,
2013-14 of the RBI, mentions: “The triad of financial inclusion, financial literacy
and consumer protection have been recognized as intertwining threads in the
pursuits of financial stability”. Financial literacy should be recognized as a
vehicle for development strategy. Reserve Bank of India has hosted “Financial
Education Project” on its web-site for dissemination of basic financial knowledge
guidance to the trainers. As per RBI advice, lead banks have set up Financial
Learning Centres ( FLC) to impart financial education in schools, community

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centres and by conducting town-hall meetings. The education camps should cover
: methods of saving , managing money, basics of banking, opening of basic
saving bank accounts, RBI initiatives on financial inclusion. The comic series
published by RBI styled “ Raju Series” and “ Money Kumar” are very useful.
As on June 2013 ( RBI data), 750 FLCs have been set up by the banks and 2.8
million people have been educated by organizing awareness camps/ seminars etc.
 With the initiatives of Securities Exchange Board of India ( SEBI)- the capital
market regulator, National Institute of Securities Market through IMS Proschool
has developed study package named “ Money Edge”, a comprehensive
programme for students of VIII to XII.
 The National Strategy for Financial Education ( NSFE), promoted by the
Financial Stability Development Council (FSDC) gives a policy framework for
embarking upon massive financial education drive in the country through the
respective sectoral regulators. The NSFE visualizes that the challenging task can
be undertaken by various stake holders including civil society, NGOs and by
using all channels of mass education. It sets a target of 500 million adults to be
imparted financial education in the next five years.
 To give a push to financial awareness and financial education among students in
the Kendujhar district- a back ward area of Odisha, Abhyutthana Financial
Learning Centre LLP ( set up in February 2014) has started conducting financial
education camps in high schools and colleges. A report of its first camp is in
Annex.
 The States should undertake awareness drive on war footing among the public
about the various deposit accepting financial entities, various deposit schemes,
chit funds, applicability/ non-applicability of deposit insurance so as to promote
financial literacy.
 On the downside, lack of safeguard to the financial savings may compel the small
depositors to place their disposable funds in unproductive physical assets, which
would add little value to the economy.

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The financial literacy drive in the country, particularly in rural sector and backward
and unbanked areas, in schools is being pursued in collaborative manner with the
participation of multitude of official and other approved agencies.
References:
1. Dr D. Subbarao, Governor, Reserve Bank of India, ( May 2013), Monetary
Policy Statement, 2013-14, Reserve Bank of India, Mumbai.
2. E. F. Shumacher, (1973), “Small is Beautiful”
3. RBI web-site.
4. Report on Abhyutthana Financial Literacy Centre LLP
Annex
Financial Awareness Camp
Venue: K.M. Vidyapith, Salapada, Anandapur- July 2, 2014
Abhyutthana Financial Learning Centre ( Managing Partner : Dasarathi
Mishra) set up in February 2014, with an objective to promote financial literacy
and create financial awareness among the school children and common man in
the State of Odisha, conducted a financial awareness camp in K.M. Vidyapith,
Salapada on July 2, 2014. In all, 159 students and 10 teachers and other
supporting staff of the school participated.
Inaugurating the camp Chitta Ranjan Dash, an eminent lawyer of
Anandapur, stressed the need of the financial awareness in the society.
Dasarathi Mishra, Chief General Manager (Retired), Reserve Bank of India,
Bhagavat Rana, Chief Manager, Bank of India, Braja Kishore Mishra, Axis Bank
explained saving habits, methods of saving money, basic banking, RBI initiative
on financial inclusion and financial literacy, procedure to open no-frills accounts
in a bank etc. A Quiz program covering basics of banking and economy was
conducted. Financial Education series books (Comic book : Raju and Money
Tree and Raju and Sky Ladder) published by RBI were distributed to the
students.

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(A picture from the Financial Literacy Camp, K.M Vidyapith, Salapada, Odisha)