Do Bank Depositors Need To Worry about FRDI?
At every financial literacy seminar of Moneylife Foundation (an NGO engaged in advocacy and financial literacy), I have made it a point to say that we, Indians, are lucky that public sector banks (PSBs) comprise 63% of our banking system. This means that there is an implicit sovereign guarantee that protects our deposits no matter how badly government-owned banks perform. This is why depositors could happily keep all their savings in term deposits with a United Bank of India (UBI) and United Commercial Bank when their net worth was badly eroded, without worrying about the bank going bust or the fact that only Rs1 lakh per depositor was guaranteed by deposit insurance. 
 
Moreover, seven years before the global financial crisis and collapse of Lehman, India’s Reserve Bank of India (RBI) had followed the ‘too big to fail’ principle. It force-merged Global Trust Bank with Oriental Bank of Commerce to prevent widespread losses to depositors, doesn’t matter that the decision may have been motivated by a need to avoid a close scrutiny of how it was sleeping on its job. In fact, over the past several decades, the only payments made out of deposit insurance is on account of failed cooperative banks, which are under dual regulation (RBI and registrar of cooperatives) and completely controlled and manipulated by politicians across the spectrum. Hence, as consumer activists, we had argued that deposit insurance must remain at Rs1 lakh, because a higher insurance will be an incentive for crooked politicians to use public money to make good their loot of cooperative bank funds. 
 
Suddenly, all this is set to change. The government has introduced the Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill) in parliament this June which has evoked strong opposition by all trade unions. The FRDI Bill aims to limit the use of public money to bail out distressed organisations in the event of a financial crisis, by providing a resolution framework to handle the failure of banks, insurance companies and financial sector entities. Bank unions, however, believe that it will give the government sweeping powers to wind up public sector banks. Meanwhile, depositors have another reason to panic. 
 
A WhatsApp message (provocatively titled “This Tsunami will wipe out your money lying in the Banks” and ostensibly written by a chartered accountant) is going viral with a link to an article in The Hindu, which suggests that our bank deposits are no longer safe; they can be appropriated by the government and converted into equity to bail out banks. The culprit is, apparently, a ‘bail-in’ clause in the FRDI Bill that allows the government to convert your deposits into equity in order to recapitalise and bail out banks that are facing bankruptcy. 
 
Depositors, who have gone through enormous hardships to access their own savings during the currency demonetisation of 2016, find it is easy to believe that the government may appropriate their hard-earned savings to bailout banks. Most Indians hold the bulk of their savings in property or bank deposits and there is already a gnawing worry over the government’s inability to deal with the mammoth bad loans of banks, which are in excess of Rs10 lakh crore. So, let’s examine whether we really need to panic. 
 
The FRDI Bill is based on a 2014 working paper of RBI. It is in line with a global move to create statutory structures to contain the contagion effect of the kind that shook the world in 2008 by the failure of large financial institutions. In November 2014, India, as part of the G20 nations, had agreed to create a legal structure which includes a ‘bail-in provision’ to recapitalise banks. But such a contingency is a matter of last resort. In fact, most global banks, including those in India (State Bank of India, ICICI Bank and Bank of Baroda had done this), have been asked to work on the concept of a ‘living will’, where they put in place a disaster management plan, if you will, on what is to be done in the event of a massive melt down.  The FRDI Bill’s bail-in provisions that are a source of panic, will kick-in only if the organisation is facing bankruptcy. 
 
What is a bail-in? It is the opposite of a bailout, where governments use taxpayers’ money to save large institutions. A bail-in gives statutory powers to a resolution authority to convert existing creditors (including depositors) into shareholders in order to recapitalise the bank. The FRDI Bill creates the statutory basis for such action by replacing the current deposit insurance guarantee corporation (or converting it) with a Resolution Corporation that will cover banks, financial institutions and insurance companies. 
 
The FRDI Bill also envisages a ‘Corporation Insurance Fund’ that will insure a part of the deposits. The extent of deposits insured is likely to be substantially higher than Rs1 lakh insured today. These insured deposits will be out of the purview of appropriation for a ‘bail-in’. We understand that, in the US, 100% of the deposits are insured; hence, the bail-in, if it happens, will primarily affect bondholders and other unsecured creditors. While it is important to remember that a bail-in is envisaged only as a last resort, it is also a fact that Cyprus has already invoked this clause to bailout banks.
 
Bank unions are correctly worried about sweeping powers in the hands of a government that rushes statutory changes through parliament as money bills, without proper discussion or explanation. On the other hand, those who were part of the RBI working group are less worried, because any hasty action that takes away the implicit safety and guarantee of deposits associated with public sector banks would only cause a run on deposits and no government in its right mind would dare do this. 
 
Indian banks are also more tightly regulated and do not have the same exposure to derivative products as those in the US and other countries. The flip side to this is that we have a massive bad loan problem that remains unresolved. Bad loans of banks spiralled from Rs39,030 crore in 2008 to Rs2,16,739 crore in 2014—all under the incredibly corrupt coalition called the United Progressive Alliance (UPA). Consequently, even Opposition leaders have been reluctant to question government policies too closely, probably fearing it would boomerang on them. 
 
I believe that the government ought to be speaking to the people to allay their fears, instead of orchestrating discussions on business channels to counter the meeting of bank unions. The finance ministry must realise that people want to be assured that 100% of their deposits would be safe and bankers will be made accountable for their loans. Merely raising deposit insurance under the FRDI Bill is cold comfort to millions of retirees whose entire savings are in low yield, taxable, bank fixed deposits, only because they safe.
 
Secondly, the FRDI Bill intends to keep out cooperative banks, which go belly-up with monotonous regularity. Then, again, this government has been very soft of cooperative banks, whether it is re-capitalising them in 2014 or giving up its tough initial stance against allowing them to exchange demonetised currency. If political compulsions will bring cooperative banks under FRDI Bill it will be a cause for concern. 
 
Thirdly, we need clarity on where non-banking finance companies, micro-finance companies and payment banks fit into this equation. While none of these are yet in a position to create systemic issues if they go bankrupt, we do have the example of the Ponzi-like deposit collection companies (Sahara, PACL and Saradha) destroying the savings of ordinary, disempowered people. 
 
It appears that FRDI Bill is part of a piecemeal response to a problem that afflicts countries that are either heavily indebted or have allowed banks to make risky bets. We don’t have that problem. We have other problems. If we have to put this law in action, we need a holistic thinking about the entire financial sector. 
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    COMMENTS

    RanjitK

    3 years ago

    The Govt defends the Introduction of the BAIL IN Clause in the new proposed Draft FRDI Bill currently under discussion in a Parliamentary Committee. The Govt says - these were G20 Commitments that were Agreed in the G20 Conference Discussions in 2014 .. in Canberra, Australia.

    Several UNTRUTHS, LIES, HALF-TRUTHS, and FALSEHOODS - in that statement ..made by Arun Jaitley, the Finance Minister.

    Do you want to know HOW ?
    Read On...

    1. Firstly, No such discussion was done during the G20 Aug-Sept 2014 Conference. Instead - at the Conclusion of the Conference in 2014, a group of eager- beaver executives - with a mission - drafted a Conference Summary statement - & tried to get the Representatives of each G20 country to Sign Off on such a Joint Common Statement purportedly "Agreed" or "Committed To" - by the Delegates to the just concluded 2014 Conference. What these Executives did - was Slip In a bit about BAIL IN into the Closing Section of this Joint Statement of "so-called" Commitment / Agreement.

    Since THIS ..has Never Been Discussed or Agreed or COMMITTED in the Conference FORMALLY - this Act of Introducing this Matter into the Joint Statement of the Conference - as a Committed, or Agreed or DONE Deal - was a FRAUD. Because this was NEVER Formally Agreed or Committed to during the Conference.

    This was an Act of FRAUD or SOPHiSTRY - to slip In such TEXT which would be either UnNoticed by Delegates, before affixing their signatures Into a Draft Joint Statement or Communiqué - OR would PUT PRESSURE ON Delegates - WHO would now Have to OBJECT TO THIS Drafted TEXT !! AS being NOT Formally Agreed, Not Formally Committed To, in the Main Conference !

    Our Delegates to THAT 2014 G20 Conference - apparently DID NOT OBJECT ...to the INSERTION OF this SPURIOUS, FRAUDULENT TEXT about COMMITMENT or AGREEMENT to such BAIL IN Provisions..

    For the NDA BJP Govt to NOW Say that We, INDIA, have an Obligation to bring BAIL IN into the Law, is a FALSE STATEMENT !! Given the way this matter was Dealt with in 2014. When their Delegate to the Conference should have Objected to the Text of the Conference Closing Joint Statement or Communiqué !!
    By REMAINING MUTE or SILENT, this BJP Govt was COMPLICIT in THIS FRAUD and SOPHISTRY BEING IMPOSED THRU THE BACK DOOR, thru Fraud and Chicanery.

    To NOW CLAIM that there is an OBLIGATION to the G20 on this matter - is being ECONOMICAL with the TRUTH. Or LIES by another Name !!

    2. SECONDLY - all this Took Place in 2014 Aug- Sept. Draft bill - with the Help of the Global Legal firms or their Proxies or Agents here in India - was produced in mid 2016. Including this BAIL IN Provisions CLAUSE. Since THIS Provision was Bound to be HUGELY SIGNIFICANT and CONTROVERSIAL - Instead of FLAGGING this HIGHLY SIGNIFICANT PROPOSED Change to our LAWS - the Govt stays Silent, Mute, COMPLICIT, on this KEY POINT. Instead of getting a Discussion Going on this matter - the BJP Govt first tries to SLIP this PAST the sleeping Public. When Vigilant Public members FLAG THIS and QUESTION the Govt on this, they try to Explain it Away, say it is a MINOR Matter, say it is an OBLIGATION to the G20, say that Anyway, our Bank Deposits are NOT protected beyond 1 lakh, and in any such case, Depositors stand to lose their money in banks of the bank's collapse, even Nationalised Banks should they collapse !!

    These are EXTRAORDINARY Statements made by this Govt !
    They are DEFENDING THESE CLAUSES & PROVISIONS !!

    THE FRAUD is the Following !

    Firstly - as explained above - this Text was slipped in into the Final Conference Closing Communique, without Discussion, without Consensus, thru acts of FRAUD by Foreign Agents OVERSEAS !!

    SECONDLY - and More Importantly - Critically, - Does Any Such "so-called" Consensus at the G20 Conference Constitute LEGALLY BINDING SOVEREIGN Obligations ? Of ANY or ALL G20 Countries ?

    The Answer is NO !!

    These are Private Discussions, in a Private Club (the G20 Club) - that have been foisted on the Conference participants & Delegates.. AS IF they have Consensus on this matter. But ANY such Consensus ..HAS NO LEGAL FORCE ..in ANY COUNTRY MEMBER of the G20 !!

    THAT is WHY they are NOW ..TRYING to make it LEGAL in INDIA !!

    What was arguably Implicit - not so easily - is sought to be made LEGALLY EXPLICIT !! Meaning - in their view ..BJP and Jaitley's sneaky Lawyers argument .. is effectively saying ..or amounting to making something which was ARGUABLY DeFacto ..into LEGALLY DEJURE !! ie Legally ENFORCEABLE !!

    INSTEAD of OBJECTING to this PEOVISION, saying it Does NOT Suit India's Nationalised Govt Owned Banks, where there is not only an Implicit Sovereign Guarantee for Govt Banks, and a moral Obligation to support its Banks and Banking system - as well as, as DOMINANT MAJORITY OWNER & SHARE HOLDER of Nationalised Govt Banks, it is Obligated as the Main Shareholder to BRING IN FUNDS to RE-CAPITALISE it's OWN Banks !!

    Instead of Rejecting this Bail in Provision - instead the BJP Govt is bringing in Fraudulent and False Arguments - saying it has Obligations to the G20 - when it has NO LEGAL OBLIGATION to the G20 in THIS or ANY MATTER. Instead it has Legal Sworn Duties, Fiduciary Responsibilities to this Country, its Citizens.. and to safeguard and Protect it's Citizens and People - from ANY such THREATS or DANGEROUS PROVISUONS sought to be IMPOSED on the Indian people - thru the BACK DOOR !!

    If THIS is NOT BETRAYAL of the Interests of the INDIAN people and Citizens - I do not Know WHAT IS ??!

    The BJP Govt is SELLING this Country OUT !! Is BOWING to FOREIGN INTERESTS, Foreign MASTERS, .. Interests that are Dangerous, Hostile and INIMICAL -to the SOVEREIGN Rights and Interests of the INDIAN People !! Especially the POOR Man in the street, who keeps his money in the Govt Banks - to save and SAFEGUARD his HARD EARNED money. That this Capitalist & Globalist supporting BJP Govt is trying Now to DESTROY !!

    SIMPLE MATTER.

    If it is NOT LEGAL - REJECT IT OUTRIGHT !! Do not allow this bunch of Shysters - to Impose such Clauses on the Indian Citizen !!

    Has the Govt told you that 14 Countries, Including Australia, have NOT made these into LAW - ??

    And the NDA BJP Govt, is rushing this through ..??!! WHY What are the Motives and Intentions ?
    DO YOU TRUST these Political Crooks + Scam Artists and their GLIB Promises ?

    I have at length - pointed out earlier the REAL Motives + Intentions are to be Found OVERSEAS. Dangerous Motives and Intentions. Of GLOBALISTS and their AGENTS in Multilateral Organisations, incl the G20.. who have a long-standing AGENDA - to UNDERMINE our SOVEREIGN Laws, FINANCIAL System and especially, our Banking System and existing Banking Laws.

    Be Warned !
    Be Very Cautious !!
    Be Very Vigilant !!!

    Eternal Vigilance is the Price of our Liberty, our Freedoms, our Sovereignty.

    Against these Globalists..
    And their Indian Political Puppets ..
    In Govt !!

    Devang Ankleshwaria

    3 years ago

    Informative Article.

    Murali Ratnam

    3 years ago

    sir
    Too many things attempted too soon . Why give such huge loans to few business houses who hoodwink the tax payers
    Our economy is based on b concept of savings & due to this we could come out of the worst crisis in 1991 when exchange reserve was precarious & we pledged gold
    Hope better sense prevails with the ruling party who have eye on 2019 general elections
    we are just recovering from the shock of note ban & we are not clear about it being effectiveness to end corruption
    On the top of it GST which has put the financial system with complex compliance
    Big business houses who owe crores try to block insolvencylaw
    Aaam admi has many things to worry about

    saravanan ramamoorthy

    3 years ago

    True. But Congress is more likely to use this weapon if it comes to power.

    S K Rai

    3 years ago

    Why banks should go bankrupt any time unless there is foul play. Merger and consolidation of small banks into a few international standard and rock solid financial entity is welcome but why bail-out on hard earned money and life-time savings of poor depositors for the foul play of a handful of cheats. THE BANKS BUY AND SELL MONEY, why loss and bankruptcy? WHAT IS THE PURPOSE OF NATIONALISING THE BANKS IF BAIL- OUT IS NEEDED ON GENERAL PUBLIC'S SAVINGS?

    Let's see

    3 years ago

    Here is another perspective (visit the following link) on FRDI bill, which may be comforting (or confusing, depends what we want to see and interpret) for the depositors.

    http://www.hindustantimes.com/analysis/frdi-bill-your-deposits-are-safe-and-banks-cannot-use-them-without-your-consent/story-TBf5QuI4eczXx8E2EhwhKN.html

    It is somewhat unclear to me (i'll re-read and try to find more in coming days), why would someone give consent, as suggested in this excerpt "Your deposits will be insured, just as they are today and there is an additional protection for depositors because the bail-in can be invoked, and your deposits be lost, only if you have given your consent for this to the bank when you signed the deposit forms."

    crajeshwari krishna

    3 years ago

    A bail-in clause included in the proposed law is perhaps the provision that immediately affects depositors. Depositors in good faith put their money in public sector banks because they know the government bailout the bank if it collapses. The new bill create panic in public. The moment news get out that banks is financially sick there will be rush to to take deposits. Neither way nit helps strengthening banking system in India.

    Let's see

    3 years ago

    FRDI Bill may not (final approval/report will be submitted in few days) be as damaging to common man (or may be every Indian resident), because facts/consequences will get registered in history and not many (even from Central Government) would like to be remembered for wrong reason (s). For now my views are based on different (but related) perspective:

    Some timelines regarding this bill and dates otherwise:

    The Union Cabinet chaired by the Prime Minister Shri Narendra Modi in June approved the proposal to introduce a Financial Resolution and Deposit Insurance (FRDI) Bill, 2017.

    The government tabled the Financial Resolution and Deposit Insurance Bill, 2017 in August in the Lok Sabha, which was referred to a Joint Committee of Parliament.

    The committee is expected to submit its report in the upcoming winter session of Parliament beginning 15 December.

    Gujarat elections Phase 1: 9th December

    Gujarat elections Phase 1: 18th December

    It may be wrong on my part to assume (so you may trust your common sense for right answer) that Central Government will introduce something at a time which can influence the outcome (read against then) of state election, so may be something is being misinterpreted/projected/misrepresented here.

    The bill, 165 of 2017 (pdf copy, i got to see) had date of 8th August. Not sure how many of us noticed, how this issue gained tremendous momentum (of course after fanned by anti-government elements including 'chosen' media partners) just before (the messages started pouring in from 3rd December onwards) Gujarat elections so as to influence the voters, as if Patidaar reservation hence further division of state/country was not enough to get in power, by following time tested ideology of 'divide and rule'? Very similar to Bihar elections (here different topic - FRDI bill, is picked), where all kind of issues were blown out of proportions to get Sh. Sh. Sh. Lalu Yadav (supported by a warm hub by AAP's AK while strengthening and uniting 'mahaROGUEgathbandhan') back in power and Shahabuddin out of jail just after eleven years.

    Mahesh S Bhatt

    3 years ago

    Bank Real Estates are 2 industries which suck money without proper valuations & destroy Ethical ways of Businesses & Living.Can Government reduce land prices?? Answer is no.Can government refund corruption taxes on land/water/air/services etc etc.. then taxes shall not be evaded.Mahesh Bhatt

    REPLY

    NIRISHA OPTICS P LTD

    In Reply to Mahesh S Bhatt 3 years ago

    I agree with you mahesh, as all politican and bureaucrats are a part of all land graabing and land scam so they will never do any reform which will kill their cash cow which generate hige money to fight election ....

    Govinda Warrier

    In Reply to Mahesh S Bhatt 3 years ago

    Very true, Sir. May I add: As far as our country is concerned, if we are able to "map" the entire domestic assets and put to use at least 50 percent, we may not have to tax income, services or even products. The only condition is, there should be severe punishment for corrupt practices.

    naresh.gulati

    3 years ago

    While this analysis makes sense and attempts to pacify the fears among depositors, I personally feel bail in as a principle is flawed whatever the triggers for a thinking in this direction . The author does indicate that insured deposits would be out of purview of the bail in, but take it that even higher insurance levels will not take care of the FDs kept by retirees or even others. The growing bad loans may grow further. Action on bankruptcy of big defaulters is still not clear. Absence of accountability for bad loans does nothing to deter the wilful wrong-
    doers. Further, the insurance caps for deposits are proposed to be left to individual banks. It's therefore likely that bail in provision may change the bank behaviour for worse, particularly because accountability remains missing. This will also result in deposit flight within the banks depending upon which banks offer a higher cap for insurance. So I guess the ideal would be to not feel obliged to have a bail in provision in the bill. If the banks are tightly regulated, they might as well do without even a situation for bail out. But making individual depositors liable for some eventuality in future at par with management would be wrong.

    B. Yerram Raju

    3 years ago

    This government has proved through AADHAR implementation the way it can use its power. Depositors have to be certainly wary of this overt interventions through legislative process. From the holistic view the Government should move to a 'wholistic' view of the financial sector. I agree totally with the views of the author.

    praveen nagpal

    3 years ago

    If the govt is so concerned about the financial institutions, why not they make any solid policy wherein the defaulters would be held accountable for this? Why not all our dear politicians contribute their hard-earned money to save these institutions? Why their eyes are on common man's money especially when there is no financial security provided to the common man in case of unemployment, fatel decease or old age pension.

    Ashwin Mehta

    3 years ago

    A suicidal step, if at all it happens. Why the chairman and managing directors of such banks are not held responsible for such a failure ? Why any common man should suffer for their inefficiency?? Why top official of RBI and those of individual banks are not made accountable ?

    J. P. Shah

    3 years ago

    No say or voice of depositors of banks. Bank Depositors Association should be revived and made strong. Retired bank top executives can take the initiative. What ever govt may assure, people are not going to believe it on face value. Politicians have lost credibility in public.

    Sadanand Patwardhan

    3 years ago

    (1) The government is putting in place a framework that would allow IMPOUNDING of Depositor's Money in case a bank fails. It would be foolish not to worry because it is "expected" to be a matter of "Last Resort". The framework has been instigated by G20 & has already been tried out in Cyprus. As Indian banking opens up more & more to foreign banks & capital, it is going to happen if the government has a free passage, then it is not difficult to see India as a casualty of "Bail In" to save foreign counterparties. Otherwise Why have a provision when it is never going to be used??
    (2) ^^We understand that, in the US, 100% of the deposits are insured; hence, the bail-in, if it happens, will primarily affect bondholders and other unsecured creditors.^^
    That is not true. The limit is $250,000/ per bank for all accounts. See www(dot)fdic(dot)gov/deposit/covered/categories.html
    (3) Also see: searchlight-is-on(dot)blogspot(dot)com/2017/12/fdri-bill-grand-betrayal-of-ordinary(dot)html

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