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Citizens’ Deposits At Risk In Bail-Out Plan For Banks

By S. Sethuraman

The neck-to-neck fight for dominant BJP with Congress in Gujarat Poll may have currently overshadowed a Modi Government plan on Bank Bail-Out which provides for citizens being deprived of their deposits in public sector banks. This figures in a major law designed to bail out the banking system in deep distress with a Resolution Mechanism.

For a dithering Government, with all its majoritarian assertions, an easy way seems to be to let banks lay their hands on people’s hard-earned savings entrusted to them in good faith. This would help banks to overcome liabilities (deposits) in the overall fumbling processes under way for recapitalisation and restoring health to the ailing banking system.

Citizens are being brought into the picture with an obnoxious provision of “bail-in” for banks, hitherto unheard of in our post-independence era, just to enable them to write down their liabilities to the people while taking big “hair-cuts” to cover losses from indebted corporate borrowers. The cabinet, to give the benefit of doubt, perhaps did not pause for a thought on such a damaging provision in the “Financial Resolution and Deposit Insurance” (FRDI) Bill, while approving the bill as a whole.

The bill was referred to a Parliamentary Select Committee in the July monsoon session. Its report would come up before the winter session of Parliament scheduled from December 15. Perhaps the Modi Government would not rule out the provision of “bail in” in the case of banks altogether except to modify it a little to soften the blow.

But If a bill of this nature is pushed through with Government’s brute majority, it would validate now what former Prime Minister Manmohan Singh had described as “organised loot” of the banking system, in the wake of the Prime Minister’s single-minded decision on demonetisation in November last. Let alone the disastrous consequences of that botched move still unfolding, a direct attack on people’s savings in the latest draft legislation would prove more devastating for the polity.

The dire implications of deposits being taken over and claimed as burden-sharing by tax-payers (and common people lodging their savings)with Government for the massive bail-out for banks would be to keep people away from banks and to seek other ways of protecting their savings. .It could cause not only loss of face for the Modi Government but also of faith in our already rudely shaken financial system and its stability.

One would await the report of the Select Committee to see what shape the Resolution Mechanism as proposed in the Bill takes. Suffice it to say that a Damocle’s Sword hangs over the people’s heads and if pushed through by an emboldened Modi Government, the alibi would be it is a Parliamentary enactment. The Prime Minister would then moralise on citizen obligations under his “Maximum Governance” through “Mahayagnas”.

The community of financial analysts and chartered accountants and other consultants has just woken up to the severity of the provisions in FRDI bill and citing a series of pitfalls ahead. Government guarantee on bank deposits being limited to Rs. one lakh only irrespective of total deposits and so the rest of the holder’s deposits runs the risk of being virtually forfeited. The Resolution Corporation is to take care of banks’ solvency by disposing off bad assets in several ways including the above noted bail-in provision for any bank on the verge of collapse.

Such a provision of empowerment for banks (bail-in) was unheard of in our financial history, in the 70 years of Modi-cursed “Nehruvian era”, or even in the wider world. Plainly it helps banks to lay their hands on citizens’ deposits, in millions and millions of accounts, to meet capital needs against write-offs (bail-out) it might generously offer (called “hair-cuts”) to the indebted, mostly corporate firms unable to meet their repayment obligations to banks.

Unless sensibly modified in the committee or in parliament itself where the Modi Government would have its way, citizens’ fixed deposits and perhaps even large balances on savings account remain endangered. To enable banks to become comfortable with reserves and restore credit growth with this kind of financing banks by citizens sacrificing their own funds would hit the high water-mark of Modi regime.

Responding to spreading concerns, Finance Minister Mr Arun Jaitley in a damage control exercise has said the FRDI Bill has “still to go through the overall drafting process. The Parliamentary Committee can offer drafting suggestions. Thereafter, it will go back to the Cabinet”

Mr Jaitley, prone to ambiguity, has not cleared the air and so his Government is still toying with the idea as the bill in draft form has emanated from the Finance Ministry itself.

As analysts point out, the banks and businesses would be going scot-free, the former with “bail-in” in spite of all their deeds of mismanagement and the latter with “bail-outs” Government provides. In turn Government would be seeking to mobilise more resources from tax-payers at a time the fiscal math is going awry.

The deposits of the people, instead of being put to productive uses for development with job creation and improvement of living conditions of the poor in deplorable conditions, are sought to be taken away wholly for bailing out big enterprises not honouring their debt obligations to banks.

The FRDC bill goes far in compelling depositors to forego the value of their deposits to some extent and exercise option to convert remaining deposits into fixed deposits of a longer duration. Large savings account balances would also be liable for the “bail-in” operations at a further loss to account-holders. The people whose votes are so desperately sought by the Prime Minister in Gujarat presently, and later in other states in the coming months, matter much less when it comes to the challenge of delivering on promises held out, as has been seen with outcomes of the 2014 Lok Sabha Poll.

The Modi Government would find things going harder in 2018, after all the exultations over the World Bank and Moody’s ranking and rating upgrades. Structural weaknesses and rising inflation would impact negatively on growth as well as on the highly focused fiscal consolidation. (IPA Service)

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