about 1 year ago
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By Ruma Dubey

“Today we cannot hold cash in the house and now not even our deposits in the bank are safe! Should I remove all my Fixed Deposits (FDs) from the banks?”

And then there are others who have been asking, “Can you check and tell me if my bank is under financially sound or weak category? If weak or even moderately weak, I will remove my FDs?”

These are the kind of questions which entire of India and the huge saving population is asking. Everyone with even a little disposable income puts money in FDs; call it our DNA or saving culture, FDs are as integral as the air we breathe.

The recent furor created by the Financial Resolution and Deposit Insurance (FRDI) Bill and more importantly, the “bail-in” is huge. There is even a massive online petition against the Bill — “Do not use innocent depositors’ money to bail in mismanaged banks #NoBailIn”. It has already garnered some 1,30,000 signs.

So is there any logic to this fear that a depositor’s money is no longer safe in banks as Govt will use it to save banks from going down under?

The answer is an emphatic NO.  Look at it from the outside first – be it a bail-out or a bail-in, it is always the money of the people that is used. A bail-out for a bank going phut comes from external sources like the Govt and this money comes from we, the tax payer. And in bail-in, the money of the tax payer is saved but those inside, which are the creditors and the depositors will have to give the money. So either way it was our money all the way.

Now on a serious note, the FRDI Bill is the need of these modern times. If we could have the Insolvency and Bankruptcy Code to address companies which have borrowed money from banks but are now unable to repay; the FRDI is a similar Bill for the all financial agencies – banks, NBFCs, AMCs of mutual funds, pension funds and insurance companies.

This Bill will replace the draconian Deposit Insurance and Credit Guarantee Corporation or DICGC, which is a part of RBI.  A ‘Resolution Corporation’ is to be set up under the new framework and there will be ‘Corporation Insurance Fund’ through which the deposit insurance would flow. The Corporation is the one and not RBI, which will monitor the financial entities and based on their risk profiles, will tag them as low, moderate, imminent, material or critical – this will be the alert or take it as a warning sign before even the wind of the storm starts stirring. It is the Corporation also which will act as the knight in shining armour if the financial entity fails. The process followed by the Corporation will be exactly similar to what RBI does today – the moment there is sense of a bank having trouble, RBI stops that bank from collecting new deposits while to prevent a rundown, prevents existing FD holders from withdrawal. This could go on and on for ages; this is what the FDRI Bill hopes to change – provide shorter and timely resolution.

The fear is not over the FRDI Bill but the clause of bail-in that excludes insured deposits.  This means FDs till Rs.1 lakh will be protected and over and above that, the Corporation has the right to use the money to bail the bank. Even under the current law, there is an insurance cover up to Rs.1 lakh. The fear is completely unfounded that this deposit cover will now go under the new FDRI Bill; that will remain but what we do not know is the amount of the insurance cover. There should logically be an increase in the cover, given the rate of inflation and value of money today.    

Then the question which comes to mind is – when the Govt has time and again stood out and said that it will continue to remain the sovereign guarantor for the deposits, what was the need for this bail-in clause? If this is a situation which is never going to arise, why bring it up and worry the depositors? It is always better to be prepared for the worst possible scenario than scramble around then.

And what we also need to know is that even today, without the FRDI Bill, if a bank were to fail, deposits beyond 1 lakh as such are not protected.

But seriously, in so many years and so many financial crisis, have we ever seen a bank going belly-up? RBI has always managed to get it merged with a stronger bank; remember Global Bank? It was swiftly merged into Oriental Bank. Or the current ongoing huge crisis of NPAs? Did any bank go bankrupt?

We should actually feel happy and safer that we have a more transparent system in place, where there is a legalized approach and is not based on the current ad hoc system. The FRDI Bill puts in place a system which is actually making the banks more accountable; more importantly, there will be an early warning signal in place. Thus the deposits in the banks will be as safe as or safer than the risk they face today.

Well, if the question is about the intent of the Govt by putting in this bail-in clause, then it holds no water. No political party, be it Congress, BJP or even the Left, will ever allow bank depositors to lose their money when a bank goes bankrupt. The recent recapitalization of banks reiterates the very same fact.

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