Finance Minister Says FRDI Bill Will Protect The Rights Of Depositors: But What Do The Facts Say?
December 8th, 2017
The Finance Minister on 7 December said that the proposed Financial Resolution and Deposit Insurance Bill, 2017 shall protect the depositors’ money and that media reports vilifying the bill are all wrong.
The Financial Resolution and Deposit Insurance Bill, 2017 is pending before the Standing Committee. The objective of the Government is to fully protect the interest of the financial institutions and the depositors. The Government stands committed to this objective.
— Arun Jaitley (@arunjaitley) December 6, 2017
In a press release, the Ministry of Finance, has pointed out that the FRDI Bill which is under the consideration of the Joint Committee of the Parliament, does not modify present protections to the depositors adversely at all. In fact, they provide additional protections to the depositors in a more transparent manner.
The Press Release:
The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill), introduced in the Lok Sabha on August 10, 2017, is presently under the consideration of the Joint Committee of the Parliament. The Joint Committee is consulting all the stakeholders on the provisions of the FRDI Bill. Certain misgivings have been expressed in the media regarding “bail-in” provisions of the FRDI Bill. 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 rather additional protections to the depositors in a more transparent manner.
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.
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. In India, all possible steps and policy measures are taken to prevent the failure of banks and protection of interests of depositors (e.g. issue of directions / prompt corrective action measures, capital adequacy and prudential norms). 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.
Speaking of the new FRDI Bill, Economics Affairs Secretary, S.C. Garg, reportedly said, “Principal guarantee for PSU Banks’ depositors come from government ownership which also remains completely unaffected.”
The FRDI Bill is a part of a host of banking reforms and enactment of laws that aim to resolve the conditions of the failing banks and other financial institutions. The Bill has been the cause of worry for depositors across the country.
What Arun Jaitley or the Press Release didn’t mention?
The Bill is facing stiff opposition from the bank employees union and depositors as well. In August, banking employees went on a strike against the proposed legislation.
This bill is being opposed for a variety of reasons. In a joint statement, the union said that the proposed law would allow the public-sector banks for liquidation or amalgamation, which could put deposits of the customers under severe risk. Even worse, provisions dealing with deposit insurance are unclear in the draft law, and there is no explanation for the amount which has to be insured by the banks.
The bill proposes to close down the Deposit Insurance and Credit Guarantee Corporation (DICGC) that was formed as a RBI subsidiary in 1971 to insure the savings of the depositors. In its stead, it intends to establish a Resolution Corporation which will monitor financial firms, evaluate stress and take “corrective actions” in case of a failure.
The problematic bail-in clause
The depositors will be affected immediately by the bail-in provision included in the proposed law. This is where the creditors of the bank would be forced to bear a part of the loss in case the institution descends. In the past, it had worked mainly against depositors. The bail-in provision was used in Cyprus in 2013 where depositors lost as much as 50 percent of their savings when a bail-in was implemented.
In banking terms, depositors are considered creditors. They are in fact unsecured creditors while making their deposits no depositor seeks security from banks. The bank uses these deposits to extend loans and earn interest. When the economy is in downturn banks come under pressure, as large corporations do not repay the money on time, leading to stress.
The problems faced by banks could also be due to lack of regulatory oversight that allowed banks reckless lending, or mismanagement of the bank.
As proposed in the bill, in consultation with the appropriate regulator a bail-in will be triggered in case of banks as deemed fit by the RBI and the Resolution Corporation.If they think that a bank requires capital to absorb losses and continue to function without breaking down, the deposits in the bank could be converted into securities like stocks of the bank.
Converting the low-risk savings of the depositors into a high-risk security stocks for a dying entity is problematic.
The Logical Indian urges its community readers to take a close look at the various provisions of the FRDI Bill and then decide for themselves if they want this bill or not.