Opinions

FactCheck: Can Banks gobble up your deposits as per a new proposed ‘Bail-in’ Bill?

Falsehood flies, and the Truth comes limping after it

~Jonathan Swift

This is an apt quote when discussing the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017. Many columnists in mainstream media have already sounded their alarm bells. They have shared fear inducing articles laced with half truths and complete lies. This has created an unnecessary panic amongst the commoners. Before we get onto breaking down the lies, an explainer is needed.

The Background:

In his Budget Speech of 2016-17, the Finance Minister Mr. Arun Jaitley had said:

A systemic vacuum existed with regard to bankruptcy situations in financial firms

He also declared that a new Bill will be introduced to address the same. In furtherance to this, a Committee under the Chairmanship of Shri Ajay Tyagi was formed which submitted a comprehensive report in September 2016. The report laid down the background, need and structure for this new bill. Further the Government also placed this bill for public comments.

Before we understand what this new bill means to you, an analysis of the current system is a must. If the new proposed system is an improvement over the existing, then surely it merits our support. Right now the insolvency procedure for banks is handled by the Reserve Bank of India. To add to this The Deposit Insurance and Credit Guarantee Corporation insures deposits for all commercial banks and “eligible cooperative banks”. Under the current regime, if an insured bank is wound up or goes into liquidation, every depositor is entitled to receive a maximum of Rs.  one lakh  even though they may have a deposit/Fixed deposit of say Rs 10 Lacs. This amount was fixed at Rs 1 lakh in 1993. Surely this is not very high. This provision has been rarely used in our present financial system. Often RBI has ensured that if a small bank fails, a big bank takes it over and ensures the depositors are not staring at a humongous loss.

The Proposed System:

One has to understand that Banks are not the only players in the financial system. There are Insurance companies, Non Banking Financial Companies, Pension funds, public sector firms like State Bank of India (formed under an Act of the Parliament), Regional Rural banks etc.

The very objective of the Bill seeks to place the new system in perspective. It reads and I quote (emphasis added):

“To provide for the resolution of certain categories of financial service providers in distress; the deposit insurance to consumers of certain categories of financial services; designation of systemically important financial institutions; and establishment of a Resolution Corporation for protection of consumers of specified service providers and of public funds for ensuring the stability and resilience of the financial system and for matters connected therewith or incidental thereto.”

The keywords here are the bill is designed to “protect the consumers”. The bill seeks to regulate all these entities under one single head. This system shall ensure that “regulatory forbearance” is removed. This means that many a times a regulator “may” delay a “financial resolution” with a hope of revival, putting every stakeholder at a greater risk of loss.

The Bill provides for a framework to grade organisations based on grades such as Low, moderate, material, imminent and critical risk to viability. This provides depositors a transparent way to gauge the health of a financial institution. Can the naysayers point out a system in the current regime which informs commoners the health of their respective banks?

The Bill seeks to form a “Resolution Corporation” which will take over the management of a financial firm once it is classified as ‘critical’. It will resolve the issues of the firm within one year (may be extended by another year). The Resolution may be undertaken using methods including: (i) merger or acquisition, (ii) transferring the assets, liabilities and management to a temporary firm, or (iii) liquidation. If resolution is not completed within a maximum period of two years, the firm will be liquidated. The Bill also specifies the order of distributing liquidation proceeds.

The key here is to understand and appreciate that a Regulator’s primary duty is to try and revive a failing  institution whereas the resolution itself aims at ensure “orderly failure”. This new bill systemises this. For a commoner this will ensure fast, efficient and speedy resolutions for you. A distinct improvement over the current system.

Just like the Insolvency and Bankruptcy code this new bill also provides for timely and professional solution to any crisis. It goes without saying that having a framework to resolve an issue IN NO WAY means that the Government is expecting banks to fail, as is being projected. This is “in case” something goes awry then regulatory framework is in place and to start off with, this same framework makes sure that “nothing goes wrong”. Definitely better than existing regime.

Currently the bill has been sent to the Parliamentary committee. This committee is expected to submit its report soon after which it will be taken up for discussion in the parliament.  Even the Finance Minister, Mr. Jaitley said a ‘lot of corrections’ could still take place.

The Lie:

1. Savings Bank account balance will be converted into an FD under “Bail in Provision”

Heavy reliance is was placed on Section 52 of the Proposed bill to spread panic that in case a bank fails, then the Savings account balance shall stand converted into another instrument and the bank can “simply refuse to pay”

Nothing can be so blatant and farther from truth than this. While only the first part of the section is being quoted, the provision specifically and unequivocally excludes the following:

As is evident, the common deposits, FD’s RD’s are EXCLUDED from this bail in provision. They shall continue to be protected. In fact, this provision might be better than the existing system because currently all the money above Rs 1 lac is lost, whereas it appears that with the bail-in provision, the amount over and above the insurance limit will at least be recoverable as some form of security.

The difference is that the new bill does not mention the amount of Insurance. As this new bill seeks to repeal the Deposit Insurance Act and merge it under a new regulator, it is but common sense that the Insured account shall be either same as existing one or even higher. It can no way be lesser than INR 1 Lac, which was fixed 24 years ago.

Lie 2: All your bank money is lost or converted into an instrument in a dying entity:

Lie. Already explained above. But a valid question is how much money will a depositor get in case a bank fails?

Section 29 provides powers to the regulator to decide the amount payable from the Corporation fund. This has not been finalised as yet. In my opinion it will not be lesser than INR 1 Lac in any case which is the current provision. I expect this to be significantly higher than this.

Why Cant it be mentioned in the Bill Itself what the Insured amount will be?

While this is desirable but not advisable. Having a strict amount leaves out any scope for upward revision. However the bill could be worded in a such a fashion: “a minimum amount of INR__________is insured or a higher amount as maybe decided by the Corporation”.

Lie 3: My money in savings account will be used to bail out big NPA accounts.

No. In case a bank has lent money to a lot of wrong companies and it eventually is facing insolvency or imminent death then everybody is at risk of losing money, including you. This bill is in fact making sure we don’t get to that stage. Historically except for badly managed co-operative banks, no big banking crisis has hit our financial system. The RBI has always ensured the depositor interest is protected. This Bill gives them more teeth to do so.

CONCLUSION

A particular clause, from a draft bill is being taken out of context, to create mass hysteria. The clause while not perfect, seems to be an improvement over the current situation, and since it is only a draft bill, the clause can be further improved. In such times it is important to not spread panic among depositors i.e. the common man. The media, instead of being a good partner or medium for voicing people’s concerns is indulging in complete lies to garner eye balls and spread their own propaganda. It is clear that they have no role to play in the interest of the people of this country.

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