ASSOCHAM said on Thursday that the government's assurance to protect the depositors' interest in case a bank lands up in trouble needs to be spelt out clearly and unambiguously in the Financial Resolution and Deposit Insurance (FRDI) Bill. It also mentioned that the clause that seeks to treat depositors as other creditors and shareholders for bail-in must be removed.
In a statement, the chamber said that that particular clause has raised doubt and panic among bank depositors. ASSOCHAM Secretary General DS Rawat said that the concept of ''bail-in'' especially by depositors should be completely done away in the Indian context, and their money has to be protected at any cost. "Otherwise, the trust in the banking system runs the risk of being eroded and the savings by the households would find way into unproductive avenues like real estate, gold, jewellery and even in the unorganised and informal financial markets run by unscrupulous people," Rawat added.
Rawat also added that most middle class families, pensioners and other elderly people usually don't have any other form of social security. In such, bank deposits are their only financial security. On top of that, the rising cost of healthcare is also a blow to the middle class. Any move, hence, to copy the Western model of bail-in must be avoided, he said.
The intention behind the clause is simply to indicate that the government should not be the one always taking the hit for a bail-out of a bank in trouble. Shareholders and other stake holders, which would also include depositors - above the limit of insured amount - should also be responsible for saving a financial entity.
The government's assurance notwithstanding, Sub-section 7 of Section 52 of the proposed law mentions that the bail-in shall not be applicable to deposits to the extent only covered by insurance. The sub-section says, "The bail-in instrument or scheme under this section shall not affect- (a) any liability owed by a specified service provider to the depositors to the extent such deposits are covered by deposit insurance."
However, currently deposits are covered only upto Rs 1 lakh, which is a meagre sum for families keeping savings of their entire lifetime in the banks.