Six days ago, when citizens of India had already received enough scary messages as to how their bank deposits were in danger due to the FRDI Bill, the Finance Ministry swung into action but with unconvincing and inadequate assurance. “The provisions contained in the FRDI Bill, as introduced in the Parliament, do not modify present protections to the depositors adversely at all. They provide rather additional protections to the depositors in a more transparent manner,” the Finance Ministry said in a statement.
Days later, Finance Minister Arun Jaitley and the ruling BJP too asked people to not give into “fears being spread on the social media” and said that the government was committed to safeguarding the interests of depositors, without telling how the government was planning to do so. The depositors, indeed, need not panic for now as the Joint Committee of the Parliament is presently examining the bill, and chances are that this bill gets properly vetted. But before that let’s revisit what makes the FRDI Bill a cause of concern? First, it’s the Bail-in clause.
What the bail-in clause is
A bail-in is rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings. A bail-in is an opposite of bail-out, in which, the banks instead of saving bankrupt companies, save themselves. So, the FRDI bill, if passed in the Winter Session scheduled to commence on December 15, will allow critically ill banks to restructure their liabilities, which are also depositors’ monies. Restructuring of liabilities means that they can take your deposited cash and issue bonds, shares etc, which can be redeemed only after a fixed period of time.
Government’s claim that the bill does not modify present protections to the depositors adversely
Certainly, the bill does not modify the present protection to the depositors adversely. Currently, bank deposits upto Rs 1 lakh are insured, which means that if a bank fails, depositors will get back Rs 1 lakh. The bill does not seek to modify this insured amount, but what it perhaps does is, for which the government has offered no explanation is that it allows banks to use any amount above Rs 1 lakh to rescue themselves.
Government’s assurance that the bill provides additional protections to the depositors in a more transparent manner
We don’t know what this means, in what context. Though the government has hinted at increasing the maximum coverage of insured bank deposits, but no action plan is there in the public domain yet.
Is increasing insurance amount helps?
Currently, a depositor is at risk of losing its money only when a bank fails — which has not happened so far. However, with this bill, depositors’ money is at risk even when the banks are on the verge of failing, much before the actual failure. So even if the insured amount is increased from, say Rs 1 lakh to Rs 5 lakh, a depositor, with Rs 25 lakh in a bank account, is still under the risk of losing Rs 20 lakh.
The Government’s implicit guarantee for Public Sector Banks remains unaffected
Yes, an “implicit” guarantee, which means, it is implied, understood, suggested, but not bound by law. And the “implicit” guarantee is only for Public Sector Banks. The Finance Ministry also said: The FRDI Bill does not propose in any way to limit the scope of powers for the Government to extend financing and resolution support to banks. This statement contradicts the entire idea of adopting a bail-in provision, which is to do away with bail-out provision, done to save banks using tax-payers’ money.
The FRDI Bill will strengthen the system in the rare event of failure of a financial service provider
The government says in the “rare event if the failure of a financial service provider”, this bill will provide comprehensive resolution regime that will help ensure that there is a system of quick, orderly and efficient resolution in favour of depositors. If a provision rescues a bank, well before it fails, the bill can save both the financial service provider and depositors’ money. But the government, neither in the bill itself nor in its multiple assurances, highlighted the crux of the bail-in provision that is to take depositors into confidence for using their money without consent.
Under the bail-in provision, depositors must be convinced that a recapitalisation under a bail-in will provide sufficient time to restore the bank’s capital strength and hence, the bank’s long-term viability. In fact, International Monetary Fund said that debt restructuring ideally would not be subject to creditor consent, but a “no creditor worse off” test may be introduced to safeguard creditors’ and shareholders’ interests. The government has said that it is committed to safeguarding creditors’ and shareholders’ interests, but so far, has offered no details.