More than 95 per cent of Indian households prefer to park their money in bank deposits, according to a recent Sebi survey. Little wonder then that the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, which will reportedly treat depositors like an unsecured creditor-giving them the last dibs on whatever is left in a bank in case of a collapse-has the country in a tizzy.
In an attempt to calm down worried depositors, finance minister Arun Jaitley today announced that the government will "fully protect" the deposits made by customers, and even hinted at a willingness to consider changes in the proposed Bill. According to him, rumours are being spread about the provisions of the bill but the "government has already clarified and said it is committed to strengthen PSU banks and financial institutions. About Rs 2.11 lakh crore is being pumped in to strengthen the public sector banks." So chances of any lender failing seem slim. Or at least that's the government's stand, never mind the fact that non-performing assets (NPAs) reported by PSU banks in the first two quarters of the fiscal year 2017-18 were about 54 per cent higher compared to the previous fiscal.
Last week, too, the finance ministry had issued a statement saying that "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 additional protections to the depositors in a more transparent manner." This statement came a day after media reports about an online petition against the proposed bill on Change.org that got more than 40,000 signatures in 24 hours. Over 100,520 people have signed the petition so far.
So what is the FRDI Bill? First introduced in Lok Sabha in August this year, and currently undergoing scrutiny by a joint parliamentary committee (JPC), the bill essentially proposes to create a framework for overseeing financial firms such as banks, insurance companies, non-banking financial services (NBFC) companies, stock exchanges, among others. And work out options in cases of insolvency. The "Resolution Corporation", which is to replace the existing Deposit Insurance and Credit Guarantee Corporation and look after the process, will be doing this by "writing down of the liabilities". The Corporation will also be tasked with classifying financial firms on their risk of failure - low, moderate, material, imminent, or critical. It will take over the management of a company once it is deemed critical.
The brouhaha is over Clause 52 of FRDI Bill, which reportedly empowers the proposed Resolution Corporation to cancel the liability owed by a bank, and/or change the very nature of a loss-ridden balance sheet by turning part of deposits into bank shares, or another security. In other words, this bail-in clause seeks to prevent insolvency by prioritising the restoration of capital and asset of the bank over and above the safety of the depositors' money. The Bill also says that in case of a bank failure, the Resolution Corporation will "provide deposit insurance up to a certain limit", which has not been specified.
"The bail-in clause is only an enabling clause. Even now, depositors get a protection only up to Rs 1 lakh of their deposits. Now, in this case if his deposits are utilised, then he will get bonds or security papers in exchange for his money. He is getting more of a protection. Anyway, we are debating it and its various clauses are under consideration. Every point will be debated and we will arrive at a consensus before it is made into a Bill," a member of the JPC reportedly told DNA Money. The JPC is expected to submit its report in the upcoming winter session of Parliament beginning December 15.
Meanwhile, the finance ministry is trying hard to build a strong case for it and dispel doubts. According to the ministry, the FRDI Bill is far more depositor-friendly than many other jurisdictions, which provide for statutory bail-in, where consent of creditors/depositors is not required for bail-in. "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, including Public Sector Banks," it said in a statement, adding that the government's implicit guarantee for Public Sector Banks remains unaffected.
"Indian banks have adequate capital and are also under prudent regulation and supervision to ensure safety and soundness, as well as systemic stability. The existing laws ensure the integrity, security and safety of the banking system. The FRDI Bill will strengthen the system by adding a comprehensive resolution regime that will help ensure that, in the rare event of failure of a financial service provider, there is a system of quick, orderly and efficient resolution in favour of depositors," read the statement. Given that the debate in the bill is expected to continue till the Budget session, depositors ought to try not to panic and rush to break their FDs.
With PTI inputs