Noise over FRDI bill 'misplaced', small depositors' money covered: SBI report
The ERD's analysis of the bank deposit base shows that in terms of the number of accounts, 67% of the total accounts are less than Rs 1 lakh while 99% of the accounts are less than Rs 15 lakh. "This shows that a number of small depositors are adequately covered under the draft bill," said the report.
- Dec 21, 2017,
- Updated Dec 21, 2017 5:58 PM IST
SBI's Economic Research Department (ERD), that advises the banks on economic and financial issues, has said that noise over the draft FRDI bill was "misplaced". The ERD said the Financial Resolution and Deposit Insurance Bill (FRDI), which aims to form a resolution corporation to prevent financial institutions, including banks and insurance companies, from going bankrupt, was equivalent to the DICGC Act.
There has been a lot of hue and cry over the bill's clauses, especially the 'bail-in' article, which allows restructuring of a bank's debt by adopting different provisions, including usage of depositors' money to take crumbling banking institutions out of bankruptcy. Though there are protections in place for depositors like insurance on the deposited amount, many believe they could lose their hard-earned money when such a situation would arrive."We need to discuss whether the concept of bail-in is justified in Indian context. Such strategy is similar to the ones adopted by EU countries like Cyprus, whose per capital income is 14 times higher than India. The average income of a vast majority of Indian depositors is modest, and they rely on interest on bank deposits as sustenance in the absence of a comprehensive social security," said the report.
On December 12, Finance Minister Arun Jaitley said the government would fully protect bank deposits of customers, saying that the government's massive Rs 2.11 lakh crore plan to infuse capital into public sector banks was to strengthen them and there was no question of any bank failing. "If any such situation arises, the government will fully protect the deposits made by customers," he said. But many of the panicked depositors say why include such a controversial clause when the government wanted to protect the interests of depositors.
The ERD report said the deposit insurance cover in India was the lowest across countries. "Even some countries with similar per capita income like India have an unlimited deposit cover. "In India, currently banks pay deposit insurance on the entire assessable deposits, but coverage is limited to only Rs 1 lakh. Our estimate shows that only 30 per cent of the total assessable deposits are insured in India (75 per cent in FY96)," the report said.The ERD's analysis of the bank deposit base shows that in terms of the number of accounts, 67 per cent of the total accounts are less than Rs 1 lakh while 99 per cent of the accounts are less than Rs 15 lakh. "This shows that a number of small depositors are adequately covered under the draft bill," said the report.
Under the new Financial Resolution and Deposit Insurance Bill, 2017, the proceeds from sale of assets of a bank would first go to insured depositors. In the previous regime, the depositors were insured for only Rs 1 lakh irrespective of the deposit made in a bank. The new bill, however, makes no mention of the maximum amount of insured deposit. There is a possibility of government and the regulator, i.e., Reserve Bank of India, keeping the same limit or lower.
The latest bill also dilutes the powers of the RBI on superseding banks boards, deciding merger and acquisitions, identifying weak banks and also systemically important financial institutions. The bill provides for establishing a Resolution Corporation, which, however, will be an independent authority, it will consult the regulators i.e the RBI for bank-related issues like weak banks or deciding on systemically important financial institutions. So the RBI's exclusive powers will again go to a new corporation having chairperson and members from the RBI, finance ministry, Sebi among others.
SBI's Economic Research Department (ERD), that advises the banks on economic and financial issues, has said that noise over the draft FRDI bill was "misplaced". The ERD said the Financial Resolution and Deposit Insurance Bill (FRDI), which aims to form a resolution corporation to prevent financial institutions, including banks and insurance companies, from going bankrupt, was equivalent to the DICGC Act.
There has been a lot of hue and cry over the bill's clauses, especially the 'bail-in' article, which allows restructuring of a bank's debt by adopting different provisions, including usage of depositors' money to take crumbling banking institutions out of bankruptcy. Though there are protections in place for depositors like insurance on the deposited amount, many believe they could lose their hard-earned money when such a situation would arrive."We need to discuss whether the concept of bail-in is justified in Indian context. Such strategy is similar to the ones adopted by EU countries like Cyprus, whose per capital income is 14 times higher than India. The average income of a vast majority of Indian depositors is modest, and they rely on interest on bank deposits as sustenance in the absence of a comprehensive social security," said the report.
On December 12, Finance Minister Arun Jaitley said the government would fully protect bank deposits of customers, saying that the government's massive Rs 2.11 lakh crore plan to infuse capital into public sector banks was to strengthen them and there was no question of any bank failing. "If any such situation arises, the government will fully protect the deposits made by customers," he said. But many of the panicked depositors say why include such a controversial clause when the government wanted to protect the interests of depositors.
The ERD report said the deposit insurance cover in India was the lowest across countries. "Even some countries with similar per capita income like India have an unlimited deposit cover. "In India, currently banks pay deposit insurance on the entire assessable deposits, but coverage is limited to only Rs 1 lakh. Our estimate shows that only 30 per cent of the total assessable deposits are insured in India (75 per cent in FY96)," the report said.The ERD's analysis of the bank deposit base shows that in terms of the number of accounts, 67 per cent of the total accounts are less than Rs 1 lakh while 99 per cent of the accounts are less than Rs 15 lakh. "This shows that a number of small depositors are adequately covered under the draft bill," said the report.
Under the new Financial Resolution and Deposit Insurance Bill, 2017, the proceeds from sale of assets of a bank would first go to insured depositors. In the previous regime, the depositors were insured for only Rs 1 lakh irrespective of the deposit made in a bank. The new bill, however, makes no mention of the maximum amount of insured deposit. There is a possibility of government and the regulator, i.e., Reserve Bank of India, keeping the same limit or lower.
The latest bill also dilutes the powers of the RBI on superseding banks boards, deciding merger and acquisitions, identifying weak banks and also systemically important financial institutions. The bill provides for establishing a Resolution Corporation, which, however, will be an independent authority, it will consult the regulators i.e the RBI for bank-related issues like weak banks or deciding on systemically important financial institutions. So the RBI's exclusive powers will again go to a new corporation having chairperson and members from the RBI, finance ministry, Sebi among others.