Sunday, October 12, 2008

Why rumors are a bad thing....

By now every ram, arun and vijay ( Indian versions of Tom, Dick and Harry ) where ever he is, would be quite aware of the financial "situation" in the world. So what happens when a big financial institution crashes..?? People fear that other institutions will collapse as well. In a financial setup, set backs are common when something major like this happens. But are all fears justified...? Definitely not.. Sometimes they just make matter worse.

Like the rumor that a major Indian bank - ICICI - was doomed because they had invested in American banks. So what happened was that people began to rush to the banks and ATMs to withdraw their hard earned money..!! But the way a bank functions, its not possible to return everyone's money within a day..!!  NO bank can do that..!! Definitely not possible..! A bank doesn't keep all the money it collects from its customers, in their vaults. They circulate and invest it..! How else are they able to give you an interest on your deposits..? Money lying idle doesn't give "birth" to more money...! It has to be sent in circulation..!

So when all the people rushed to get their money out, the bank was in a tight fix. Apparentlly they had to sell some of their shares and get loans to give back the money to demanding customers. Inspite of several reassurances from the bank, that there was no reason to panic, that they had not invested overseas and that they had enough funds, the frantic crowds didnt listen. Even the RBI's increased release of liquidity and reassurances didnt solve the problem. The bank had to close down their ATMs and send back the customers. Hard hit by the rumors, their market value nose dived and they are no more the leading private bank in the country.

People need to be patient and give it some time, instead of making it worse. If there is a world wide financial problem, everyone will be hit, someway or the other. This way, is just aggravting the problem furthur. Plus, the regulatory bodies are quite well equipped to handle if at all there is any problem. A bank wont be allowed to go down with the people's money...!

Banks are built on trust and when it takes a beating, things go from bad to worse. No matter how big a bank is, a bad reputation or a rumor will bring it to its knees in days. So the moral of the story is, even if a bank is not collapsing, people will make it go bankrupt. And if it was indeed collapsing, people will make sure that that it falls down to the last rupee...!


Philip Kingsley said...

Its a Sad note that many people(including educated people) just blindly believe the info that reaches their ears. If they just think about it for a second and search whether the info is trustable, then there wouldnt be any such problem.

Aslam said...

Well.. apparently only educated people have more access to such rumors, because of the various sources through which they get their info from..

Visu said...

Another economic depression?

Aslam said...

just a slow down as far as India is concerned i suppose. These things do repeat after a certain number of years..