After the cases of Harshad Mehta and M S Shoes, the authorities regulating the financial sector have demonstrated their utter incompetence in handling a crisis in the financial markets yet again in the case of CRB Capital Markets. In an ostensible bid to protect the interests of the investor, RBI has ensured that investors lose every penny they had invested in the company. 

The issue is not whether a promoter who has (presumably) mismanaged his business causing a loss to the investor should be questioned and punished. The issue is whether we are resolving the matter in a constructive manner. And whether we are projecting the apparent investor concern of the regulatory agencies without an understanding of the implications.. 

It appears from preliminary indications that the company has assets of around Rs.200 crore against liabilities of around Rs.600 crore including Rs.180 crore of deposits. Since banks who have lent money could be secured creditors, if the company is liquidated now, the depositors are unlikely to get back any amount. Simultaneously the share price of the company has tumbled to nothing and consequently, public investors in the company, both in equity as well as deposits, are more harmed than protected by the so-called 'crack down'. 

The responsibilities of RBI are higher than apparent. It was widely known in the market that the company was paying abnormally high incentives on its deposits. This was indicative of the high cost of funds with which the company operated its business. In the beginning, the company justified its high-cost borrowing on the premise that it was investing in shares and securities where the returns were good enough. If this information which was known to every keen observer of the deposit market was not known to RBI, then the aggreived depositors could consider RBI grossly negligent of their monitoring responsibilities. So was CARE which had accorded an 'A' rating (adequate safety) for the deposits. After all this, if RBI had granted a 'Banking licence' to the group, an investor cannot but infer that the company was in good shape. 

It must be remembered that in resolving a crisis of this nature, abrupt closure of business is more harmful than a gradual winding up. In any business, if the trust of the investors and lenders is lost, the business cannot survive. If there is a run on even a nationalised Bank tomorrow, there is no way the business can be sustained without infusion of funds from outside. 

For RBI, the right approach to this crisis would have been to sit with the promoter and explore across the table possibilities of merger of the company with another asset-rich company of the group which is still in the promoters hands. Later it could organise a phased withdrawal of the said company from business without the wide publicity the current action has generated. In the process, small depositors could have been paid off first and assets could have realised their fair market value. Perhaps the business also could have been restructured, consolidated and made viable. 

Putting together such a programme with the great risk of the step being perceived later as an attempt to bailout a promoter would have required great courage on the part of the RBI officials, and appropriate skills. It is the duty of RBI to develop a suitable system within its regulatory framework to make this possible. Such a system should recognise the fact that the strict rules of regulation that can be effectively implemented for a prospective business can be destuctive when applied to an existing business. Unless such a mature understanding of the NBFC business is displayed by RBI, it is difficult to envisage a successful role for RBI as a regulatory agency for NBFC business. 

We still remember how SEBI as an apex regulatory agency for capital markets has been systematically eliminating the investors in the guise of protecting them. Let us hope that RBI will not follow SEBI's footsteps, eliminating the 'Depositors' in the NBFC market. Growth of this segment of the industry is rather critical for the health of the economy. Chocking the NBFCs in an economy where banks are reluctant to lend their funds would irrevocably choke the economy itself.