Why a new bill by government is terrifying the Indian bank depositor
The Financial Resolution and Deposit Insurance Bill, 2017, first introduced in Lok Sabha in August this year during the Monsoon Session of Parliament, and currently undergoing scrutiny by a joint parliamentary committee, is in the eye of a political storm. A number of columnists and banking sector experts have red-flagged the “bail-in” clause – clause 52 of the draft legislation – to indicate that potential harm to deposits, in the form of savings accounts, might be in the offing with the Bill that will be taken up once again during the Winter Session of Parliament.
The FRDI 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 in case of insolvency, work out options. The “Resolution Corporation” which is supposed to look after the process and prevent the banks from going bankrupt, will be doing this by “writing down of the liabilities”, in others words, a “bail in”.
Though common in European and American banking systems, the bail-in clause in the Indian banking system that – for the ordinary citizen – is largely deposits-driven, and not as much credit-driven, could be laced with difficulties. Particularly at a time when the growing menace of rising non-performing assets (NPAs) or bad loans has hit an all-time high, with PSU banks writing off Rs 55,356 crore in the first two quarters of the fiscal year 2017-18, about 54 per cent higher than it was last year, the bail-in clause is alarming, to say the least.
What’s the bail-in clause?
A bail-in is different from a “bail-out”, wherein insolvency is averted by infusion of money from external sources, such as tax-payers money that government pours in to recapitalise banks, as happened during the 2009 trillion-dollar Wall Street bail-out, one of the first decisions taken by former US president Barack Obama. However, unlike a bail-out, a bail-in involves transferring the bank’s liabilities and assets – through different means and restructuring of its debt.
The bail-in clause in the FRDI Bill seeks to absorb the losses of the bank and insurance companies and prevent insolvency by prioritising the restoration of capital and asset of the bank over and above the safety of the depositors’ money. How? Clause 52 of FRDI Bill, 2017 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.
The Bill says that in case of a bank failure, the proposed Resolution Corporation will “provide deposit insurance up to a certain limit”, which has not been specified. Under the existing (1962) law, all deposits up to Rs one lakh are protected by deposit insurance under the Deposit Insurance and Credit Guarantee Corporation Act, but that limit has been removed in the FRDI Bill.
How does it affect security of deposits?
In the wake of demonetisation, when citizens were cut off from accessing their own money in the banks with the daily cash withdrawal limit and long, serpentine ATM queues that proved fatal for about 140 odd Indians, the bail-in clause does send off the alarm bells. As per the FRDI Bill, the Resolution Corporation is entitled to convert a percentage of the deposits with a bank to bank shares and other forms of security, in the name of recapitalisation. This might end up cutting off the small depositors from their hard-earned money, since part of the amount in a savings account can be turned into a fixed deposit or rejigged to become part of bank shares, with the depositor given a miniscule stake in the bank’s doddering fortunes, effectively stalling him/her from withdrawing money as per one’s needs.
Much like demonetisation, the bail-in clause wouldn’t really affect the wealthier sections of society, but for the poorer classes locking up one’s deposits in the name of bank recapitalisation after writing off lakhs of crores worth corporate debt is a stinging rebuke of the sprawling millions, who use the bank less for seeking credit and more as a safe-house for their meagre savings. While the banks can see influx of fresh capital with the little rearrangement, this is going to hurt the lower and middle classes, if invoked.
"This bill gives power to a government entity to use depositors’ money to save a bank on the verge of bankruptcy. This government entity can declare the bank doesn't owe you any money though you have deposited your hard earned money with it. Yes! Our hard earned money that we have saved for our children and for our future. That's why I have started this petition asking the finance minister, Arun Jaitley to remove the 'bail-in' provision from the FRDI Bill," says a petition by Change.org.
Trends in PSU banks worrisome
The financial jugglery of the FRDI Bill is already facing political heat and is likely to create a storm in the Winter Session of Parliament which starts from next week. Despite reassurance from Union finance minister Arun Jaitley, the trust in the government over matters economic is shaky at best. "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. The government's implicit guarantee for public sector banks remains unaffected," a government statement said.
Hence, FM Jaitley has indicated that a rethink is on the cards, in which the bail-in clause is going to face a serious challenge from the joint parliamentary committee. Given that not more than 30 per cent of the NPAs from corporate defaulters, often wilful defaulters, is likely to be ever recovered, the humungous burden of bad loan on the PSU banks, to the tune of Rs 15 lakh crore, remains an albatross for the fiscal health of public sector banking.
However, coercing depositors to turning their savings to fixed deposits and/or bank shares and other forms of assets that becomes ready capital for the bank and returns its balance sheet to good health, is not the way to recapitalise banks.