When CRB Capital Markets first failed to repay its depositors, it was only one failure amongst the many finance companies that were in operation in the country. What is sad however, is that the effects of the mishandling of the CRB fiasco by RBI is now gradually suffocating many other companies and their Depositors. Investors are finding it difficult to get timely repayments from even companies which have been servicing their depositors faithfully for several decades. Some companies are offering options to the Depositors to repay the money in a phased manner. Obviously Depositors are confused and unable to determine what to do next. The legal remedy which may involve filing of a liquidation process or getting the Directors jailed is of no use. It is in the interest of all investors that a workable solution can be found to reduce the possibility of defaults. Such a solution may perhaps be implemented only with the cooperation of all the parties concerned. Unfortunately the government action in this regard is getting delayed and unless the investors or their associations take up the matter with the necessary authorities, the matter will not get the required attention.

Amongst the NBFC s there are those who were engaged in what is called "Asset Financing" . Such companies take the Depositors money, buy trucks or Cars or Machinery or Consumer Durable and give for hire or hire and purchase to intending persons. In each such case, they would have collected margin money from the asset users and would be receiving monthly installments. If such a company raises Deposit of Rs 100,000, they would buy and hire out assets of approximately Rs 130,000 including the margin money. The repayment of Rs 100,000 funded by the company would be made by the user in monthly installments of 36 or more along with interest at the rate of about 28% p.a.. Out of this earning the Finance company pays the interest of 14 % p.a. or less for the Depositor , meets its administrative expenses and earns profit to be distributed as Dividends. If the company has borrowed money from Banks and other sources, the interest rates would be at around 18 % p.a. but the revenue is still at about 28% p.a. . Many companies who lend for trucks and second hand vehicles earn on an average 30% p.a. to 36% p.a. Until the user fails to repay the installments fully, the company has full legal rights to re-possess the asset and auction it to recover its money. This kind of operation will therefore have adequate cushion for companies to run its business on sound health. Any additional funds mobilized will create additional assets making the company stronger. Only when large scale defaults occur and Users of assets abscond with the assets will such companies suffer irrecoverable losses. If the company is reasonably well managed, the defaults are kept at levels low enough to be covered by the profits.

Investors of such companies have no reason to panic and rush to withdraw their deposits. When they do so, the company cannot ask its users like wise to return all the future installments immediately. If they do, even honest users would default.

The panic created by RBI in the Deposit market has precisely created this situation. Many large and influential depositors have used threatening tactics and confiscated assets of the companies such as computers, office equipment , cars etc., sometime with the assistance of political help. In the process ,the companies have been unable to run their usual operations, send their staff for collections and recover installments. All this has further complicated the scene and converted genuine companies also as Default companies.

Unless Depositors realize that by bringing undue pressure on the companies to recover their deposits they are only harming themselves, a solution cannot be reached. Even the law making authorities should realize that business failures occur in all businesses and it is illegal to arrest company officials just because some defaults occur in Deposit repayments. By doing so they are forcing closure of companies and closing all options of recovery.

If Depositors can show patience and law makers show prudence, and both understand the business principles under which Depositors money has been accepted by the companies and used, the Depositors can organize a scheduled repayment program for all the Depositors. One way by which this can be achieved is to appoint a "Trustee" for the Depositors of the company. The receivables of the company should be assigned to the trustee who would allocate a certain percentage of the receivables towards meeting the day to day running expenses of the company. The balance would be used to repay the maturing deposits in monthly installments over a period. If the Depositors have faith in the Trustee that the money would not be diverted, the panic in the market would stop. If the Trustee is knowledgeable, he can assess whether the receivables are genuine and what would be the extent of bad debts etc.

Commercial Banks who have the knowledge of Finance and who have in the past been acting as Trustees to Debentures are ideally suited to meet this role of "Trustee". They can charge a reasonable fee for their services to cover their expenses and also develop this as a potential business. In fact this would be an arrangement under which companies who would continue to be in business and have the necessary expertise can raise Deposits in future. Since the Trustee would be monitoring the monthly repayments, he can spot problems at an early stage and initiate corrective process also. Such an arrangement would obviate the need for Credit Rating which is any way an inefficient tool in guiding the investors.

To make such a scheme work , a Banker should come forward and work out a scheme along with the company and the representatives of Depositors, whereby the existing Deposits can be brought under the Trust arrangement. Perhaps an investor’s association can act as an intermediary in making this possible. This can not only save the Depositors today but also help the companies to continue to be in business.