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FRDI Bill Raises Serious Concern Among Bank, Insurance Depositors

By Nantoo Banerjee

The Financial Resolution and Deposit Insurance Bill 2017, or FRDI Bill, which is expected to be moved during the short forthcoming winter session of Parliament, has rightly created a serious concern among all sections of depositors with banks and financial institutions as it seeks to dilute the security of deposits in case of institutional failure. Although the government, under growing public pressure, tried to defend the provisions of FRDI Bill, last week, saying the proposed legislation is aimed at protecting the interest of depositors, few are really willing to buy such an assurance. There are several issues. One of them is the ‘bail-in’ provision in the new bill, which seeks to allow a government entity to use depositors’ money to save a financial institution on the verge of bankruptcy. An online petition against the Bill by a Mumbai-based lady, Shilpa Shree, has got some 40,000 sign-ups within 24 hours, supporting her appeal to Union Finance Minister Arun Jaitley to not let this Bill pass with the provision. The finance minister responded quickly in a twit saying: “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.”

Bank and institutional depositors are not convinced. Interestingly, the All India Reserve Bank Employees’ Association (AIRBEA) has demanded that safety and security of depositors’ money must be ensured before the passage of the proposed FRDI Bill that seeks to set up a Financial Reconstruction Corporation (FRC) to deal with debt-stricken, bankruptcy-facing banks and institutions. The proposed FRC will be empowered to order amalgamation, merger, liquidation, and acquisition of any bank, insurance company, and non-banking finance company if it feels the institution concerned carries an ‘imminent’ or ‘critical’ risk to viability. According to AIRBEA general secretary, Samir Ghosh, FRC can declare any of the entities under its control ‘bankrupt’. He fears that measures to stave off the risk may include confiscating part of depositors’ money. The Association said that as of now, a bank depositor is insured to the extent of only Rs.1 lakh in case of a bank failure. The Deposit Insurance and Credit Guarantee Corporation under the RBI has been processing the same since 1960. Incidentally, Rs.1 lakh was a lot of money in 1960 when a ‘lakhpati’ was genuinely a much more wealthier person than today’s ‘crorepati.’ Till the end of 1980s, an annual income of over Rs.1 lakh declared by a person in India invited a gross income tax, including surtax, of well over 80 per cent. Very few boasted such an income. Indians are forced to save money, mostly with government-controlled banks and financial institutions like State Bank of India, other nationalised banks and Life Insurance Corporation (LIC), for their future financial protection in the absence of a government-sponsored universal social security support system.

Even today, the minimum pension offered to an industrial worker by the office of the provident fund commissioner under the union labour ministry is only Rs. 1,000 per month. If the fate of the common man’s hard-earned savings even with banks and institutions are not fully safe, where will they go, how are they expected to survive? Going by the AIRBEA’s concern, the section 52 of the FRDI Bill appears to be quite damaging to the interest of depositors. According to this section, depositors will lose their rightful claim to retrieve their savings in case of liquidation of banks and insurance companies. Such usurpation of depositor’s money happened in many European countries post the 2008 meltdown. So long as common depositors in India kept their hard-earned money mainly in public sector banks, they were seemingly assured of safety. However, even such a security may not hold good for long as the government is shedding its equity stake in public sector banks which are saddled with huge NPAs. Bank depositors cannot be faulted for being apprehensive on this count, AIRBEA points out. Generally, there are reasons to be critical of some of the controversial provisions of the bill, including a “bail-in” clause, which suggests that depositor money could be used by failing financial institutions to stay afloat.

The finance ministry, on its part, defends the bill by stating that “the provisions contained in FRDI Bill, as introduced in Parliament, do not modify present protections to the depositors adversely at all. They provide additional protections to depositors in a more transparent manner. 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.” The government says 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. “Government’s implicit guarantee for public sector banks remains unaffected.”

On the face of it, the Bill aims to limit the fallout of the failure of institutions like banks, insurance companies, non-banking financial companies, pension funds and stock exchanges. But, opposition parties see some of its provisions as anti-people and anti-poor. They feel that people’s money is sought to be used to bail out banks and financial institutions that made bad lending decisions. Under the circumstances, the bill needs to be thoroughly scrutinised by Parliamentarians, trade unions and stakeholders before it is passed by Parliament to become a law. Also, more than the assurances of safety and security of bank and institutional deposits, there is an immediate need to enhance insurance cover on bank and institutional deposits by the common man to the extent of at least Rs.1 crore each. And, that should ideally be managed by the Reserve Bank. (IPA Service)

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