December 2017 began on a stormy note when media reports started emerging over the proposed Financial Resolution and Deposit Insurance (FRDI) Bill and how it put depositors’ money in danger under its bail-in clause. Once the controversial bill gained momentum, online petitions against it started flooding, coupled with furore on the social media.
The public pressure made Finance Minister Arun Jaitley to give assurance to depositors multiple times — rather unconvincingly — only until Tuesday when he said that the government is open to suggestions for raising the deposit insurance limit from Rs 1 lakh currently, which was one of the first demands under the provision. On Wednesday, Cogenesis also quoted Economic Affairs Secretary Subhash Chandra Garg saying that there was no likelihood of a Bail-in in the case of 98% of the depositors.
What Arun Jaitley said in Rajya Sabha
Finance Minister Arun Jaitley on Tuesday assured the Rajya Sabha that the government is considering putting in place a “much better” security measure for bank depositors and is open to suggestions for raising the deposit insurance limit from Rs 1 lakh currently. He further added that the use of Bail-in provision would be rare. “Bail-in provision may not be required to be used in case of any specific resolution. Most certainly, it will not be used in case of a public sector bank as such a contingency is not likely to arise,” Arun Jaitley said.
How it began
In the beginning of December, a chartered accountant wrote a piece saying how FRDI Bill’s Bail-in provision was going to wipe-out depositors’ money to save banks, which are already sitting on a huge pile of non-performing assets. With this analysis, protests by the All India Reserve Bank of India Employees Association (AIRBIEA), which had happened several times since the bill was tabled in Lok Sabha in August, also got attention. The main demand of the AIRBIEA was to increase the maximum coverage of insured bank deposits from Rs 1 lakh to Rs 10 lakh.
What is Bail-in and does it really put depositors’ money at risk?
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. The bill allows critically ill banks to restructure their liability, which is also depositors’ monies.
“Critically ill banks can change the structure of their liabilities under the bail-in clause to rescue themselves. 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,” Samir Ghosh, General Secretary, All India Reserve Bank of India Employees Association told FE Online last month.
Not a bad concept
However, the Bail-in clause is not a bad concept if a proper legal framework is brought in. While Bail-in badly failed in Cyprus as due to non-planning, it has been proved successful in Denmark as it well-planned and done in an orderly manner. In fact, the International Monetary Fund (IMF) advocated the “from Bail-out to Bail-in” concept and said that it is essential to have clear and coherent legal framework for bail-ins.
“An appropriate balance between the rights of private stakeholders and the public policy interest in preserving financial stability. 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 IMF said.
The FRDI Bill was deferred from the Winter Session of the Parliament to Budget Session and is currently with the joint committee of both the Houses. The joint parliamentary committee is going to give recommendations on the bill, following which the government may make certain changes. So far, the government has said that it is open to increasing depositors’ insured amount and use the bail-in clause in rarest of the rare situation. However, it is unlikely that the joint committee will give its report in the Budget session as it was given an extension until the last day of the Budget to submit its report.