Are your savings safe in a bank? This question has come to the fore after a reading of the clauses of the Financial Resolution and Deposit Insurance Bill, which was tabled in Parliament. Essentially, the Bill is for financial institutions like banks and insurance companies what the Insolvency and Bankruptcy Code is for non financial companies. It seeks to create a proper law that will help identify and resolve stressed financial institutions quickly.
The Bill provides for the setting up of a Resolution Corporation, which will classify financial institutions according to their risk of failure. It will replace the Deposit Insurance and Credit Guarantee Corporation. In a worst case scenario, where the financial institution is in deep trouble, the Resolution Corporation can take charge and initiate steps to resolve the crisis. The worries arise because the current provisions of the Bill allows the Resolution Corporation to take steps like cancelling the liabilities of the bank. Which would imply that deposits - which are essentially the bank's liabilities - can be cancelled if the bank runs into serious trouble. This is the "bail-in" clause that everyone is worried out. So far, banks in many countries have been "bailed out" by governments - which involves using public money to save the bank from failing. A bail-in would imply using the depositors' money to do the same.
Finance minister Arun Jaitley has said that depositors' money would be protected. However he has not clarified whether he is talking about the insured deposits or also the uninsured deposits.
Few people are aware that even today, the amount of your deposit insured in the bank (and therefore completely safe) is merely Rs 1 lakh. Anything beyond that is not explicitly guaranteed by any law or regulation or the government. Money deposited in banks have been considered completely safe so far because the government and the Reserve Bank of India (RBI) has never allowed any bank to fail. Strong banks have been nudged to take over weak banks that were on the verge of serious trouble, in the case of private banks. In the case of government owned banks, it is implied that the government will not allow the bank to collapse.
The FRDI Bill in its current form however has provisions of what can be done in case of a collapse. Under the FRDI Bill in its current form, insured depositors stand at the top of the queue in case assets need to be liquidated to pay back creditors after the collapse. The FRDI Bill does not say how much will be the amount insured - it could be Rs 1 lakh as it is currently, or more or less. That will probably be decided later.
Uninsured depositors come pretty well down the list of payees as this earlier article in Business Today (FRDI Bill: Depositors stand at fifth position in a bank liquidation by Anand Adhikari) points out. Their turn will come after insured depositors, legal costs of liquidation, secured creditors and workmen's dues for 24 months have been settled. That makes the bill pretty scary for most depositors.
But then the only implicit guarantee of your money in the bank being safe has always been the fact that the government and RBI has never allowed any bank to collapse so far. For any government, the political cost of allowing a bank to fail is too much, no matter how small the bank is. And that is essentially your only safeguard. Otherwise, your money is not all that safe in the bank anyway.