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A Matter of Trust

The implications of the government's response to the NSEL fraud are far wider than you might think

The fact that Indians seem to prefer non-financial savings to financial ones has been widely lamented in recent months. In fact, our love of gold and of buying real estate as an investment is said to be at the root of many problems. We want to our wealth in a form that we can feel in our hands and under our feet, rather than in a form in which it is printed on a piece of paper, or worse, as some pixels flashing by on a computer screen.

It goes without saying that for this non-physical, financial wealth to function smoothly, we have to implicitly trust the institutions that are involved in creating and storing this wealth. And here the story of failures is getting longer and more and more shameful, with a new chapter added every few years.

For some unfathomable reason, the NSEL fiasco seems to have received less attention than its size and brazenness would lead one to expect. There's an impression around, perhaps deliberately encouraged and even officially expressed, that those who lost their money were rich and perhaps even members of that abhorrent tribe--speculators--and therefore deserved what they got. Plainly, this is nonsense. If the idea is that financial regulation is to be run on the basis that a scam is only to be taken seriously if relatively poor people lose money, then that would be a strange form of financial inclusion. We might as well shut down the equity markets and focus on ensuring that the chit funds of the country are well run.

For me, the puzzling part of the NSEL story is the absence of any outrage at what has happened. Here was a company running its business openly across the country, it even had the word 'National' in its name. It's a financial business, supposedly one of the most tightly regulated ones. Now it has been discovered that this company was doing this business without being regulated at all. No less than the finance minister of the country has said that the NSEL was an unregulated entity and that investors gave money to it knowing that it was unregulated. This is now the official line and a number of high officials have repeated it.

Firstly, a large number of investors did not know that it was unregulated. Salesmen from prominent brokerages were going to clients and pitching NSEL products just as they pitch other financial products. The implications of the official stand is that a financial business could be running openly for years, be owned by a group to which the government has given permissions to run all kinds of other financial businesses, and yet if an investor does not investigate himself whether it's legitimate, then it's his problem.

Tell me, next time you go to a branch of HDFC Bank or ICICI Bank to deposit money, how do you know for a fact that they are regulated entities? What proof do you have that Chanda Kochhar and Aditya Puri are not charlatans who are pretending that they are running legitimate banks but in fact they don't even have a banking license? Have you verified it yourself? When you go to the bank branch next, do remember to ask for a copy of the banking license and cross-check it with the RBI. Of course, you must first make sure that the RBI is actually authorised to act as India's central bank. These days, one never knows.

But you won't actually do this. You won't do it because you trust implicitly that if a well-known organisation is openly running what is supposed to be a highly regulated business, and has been doing so openly for years across the country in a most high profile manner, then it must have been permitted to do so. You trust that if this were not the case, then by now, someone would have shut it down.

Apparently, this trust is misplaced. You are on your own. So when you start transferring all your financial wealth to gold, just make sure you test its quality. Yourself, with your own two hands.