How to Avoid Money Traps That Decimate Savings & the Revised FSDR Bill
Ordinary people, who hope to invest their hard-earned savings safely, need to focus, first on avoiding losses and then ensuring that they earn a decent return. The key to this is to say a firm no to a vast array of financial products that are hard-sold to us by financial intermediaries.
 
Just as important is to resist temptation and avoid scams that are positioned as lucrative investment opportunities. 
 
 
This was the thrust of a presentation on 'Money Traps That Decimate Savings & the Revised Financial Sector Development & Resolution Bill 2019 (FRDS)" at Moneylife Foundation today. 
 
The FSDR bill, which has been exclusively reported by Moneylife, may be introduced in the forthcoming budget session of parliament, may be just as controversial as the earlier FRDI (Financial Resolution and Deposit Insurance) bill that was withdrawn from parliament in 2018 after it triggered serious panic among people. 
 
 
The five mantras, articulated by Ms Dalal, include: protect your money, insure for securing future, avoid credit and investment traps, focus on a few safe products, avoid emotional traps and maintain financial hygiene by either being fearful or sceptical and ask questions.  
 
Quoting from a November 2016 seminar of investigating agencies, including Central Bureau of Investigation (CBI), Ms Dalal, says, "More than six crore Indians have a staggering Rs85,000 crore from 26 states to financial frauds."
 
"The biggest source of losses for Indians today is unregulated Ponzi, or multi-level marketing (MLM) or Pyramid schemes," she said, adding, "Any scheme that asks you to introduce two new investors or more to get the extraordinary returns is a Pyramid. In such schemes the promised returns are anywhere between 24% to over 100%. These people find women as easy targets. While the central government in July 2019 had passed the Banning of Unregulated Deposit Schemes Bill (BUDS) 2019, its implementation is still handled by state governments."
 
 
BUDS Act envisages an outright, nationwide ban on unauthorised deposit-taking and makes promotion and advertising of these schemes unlawful. It also criminalises unregulated deposits and there are specific provisions to confiscate proceeds of crime and refund depositors’ money. Due to the law, all schemes that are not specifically cleared under the Act will be banned, Ms Dalal added.
 
As a rule, she says, "Try and invest in products regulated by SEBI, RBI, IRDA, and PFRDA. While this is not a guarantee, but there is pressure on the regulators to act when something goes wrong. However, keep in mind that India has a poor grievance redress system and thus there is no alternative to being careful."
 
Responding on question about which is the best bank, Ms Dalal, a veteran journalist and founder-trustee of Moneylife Foundation, says, "Public sector banks (PSBs) are owned by the government and are relative safe. But this may change after the FRDS Bill. Larger private sector banks are also safe, but looking at what is happening at Yes Bank, we needs to be on alert. Cooperative banks like the PMC Bank are dangerous as they are under dual regulation and every month, one or the other cooperative bank fails. But soon, these banks may come under single regulation under the Reserve Bank of India (RBI)."
 
 
She also explained new banks like small finance banks and payment banks as well as peer-to-peer (P2P) lending. Especially warning about P2P lending, she says, "It is hard sold on the claim that you earn far more than a fixed deposit (FD) and can choose class of borrower. But this is a pretence of choice. For individuals, it is impossible to do due diligence and assessment before lending money from a platform. While there is a cap of Rs50 lakh on individual for P2P lending, who will monitor if the limit is breached? P2P industry association is already lobbying for increase this limit to Rs1 crore. But do we trust RBI to monitor this?"
 
Ms Dalal also explained unclaimed deposits, dormant or inoperative accounts and how one can reclaim the deposit or make the account operative. 
 
Ms Dalal also touched upon the relationship managers from banks. She said, "Relationship managers usually work only to earn themselves fat commissions from your investments. Thus, most 'relationship managers' resort to mis-selling or hard-selling a product. In order to be safe, one should have all communication documented."
 
Ms Dalal also warned about signing blindly on any form or paper without reading and understanding it. 
 
She asked the audience to pay attention to passwords, personal identification number (PIN) and one time passcodes (OTPs). "Don’t fall for FREE gifts, or coupons offered by strangers who want you to share OTPs. Don’t be in a hurry to download apps for freebies. There are innumerable fake emails that look very official and do not rush to click on links in such emails or messages. Be careful while spending money online for shopping or travelling. Also we need to beware of being cheated through online sales networks where buyers send QR codes or links to click. This is applicable for scamsters pretending to be employees seeking verification," Ms Dalal added.
 
Women tend to hold on gold as lifetime investment products, but when it comes to contingencies, they try to obtain a loan on this gold, which is not the right choice, Ms Dalal said. She informed the participants on different components of gold loan, like interest, processing and valuation charges, loan to value ratio and payback time. 
 
Ms Dalal then explained about credit history, credit score and reports, which are becoming increasingly important. She said, all your borrowings and repayments for credit card, student or education loan and other loans, are tracked by credit information companies, like CIBIL, Experian, CRIF Highmark and Equifax. 
 
The Bail-In Issue and FSDR Bill 2019
 
Ms Dalal also explained the audience the dangers of Financial Resolution & Deposit Insurance (FRDI) Bill that is being revised as Financial Sector Development & Resolution (FSDR) Bill. She says, "The earlier version of this bill triggered a panic among stakeholder, especially bank customers with its 'bail-in' clause. Bail-in allows deposits above an insured ‘threshold’ to be converted into equity to re-capitalize banks. In fact, in Lok Sabha, the finance minister had to reassure people that deposits were safe. Later in August 2018, the FRDI bill was withdrawn with an intention to rework and re-introduce."
 
However, she says, there is a ‘secret’ note from Atanu Chakraborty, secretary of economics affairs that talks about FSDR bill, which may be introduced in the upcoming budget session. "While India needs a financial resolution framework, the FSDR bill says there is a 'systemic vacuum'. FSDR is an umbrella legislation like Bankruptcy Act. The FSDR covers banks, insurance companies, financial market infrastructure, payment systems and other financial service-providers. It also provides specialised mechanism to resolve financial failure," Ms Dalal says.
 
In addition, she says, "the bill fixes holes in the FRDI bill and includes systemically important financial bodies like IL&FS. The FSDR also provides clear triggers at which resolution action will be triggered. There is a provision under FSDR to create a resolution authority (RA) to handle financial sector resolution. FSDR aims to work with existing financial regulators, who will prepare a resolution framework and when action will be triggered in their domain."
 
For such an important bill that would affect all financial consumers, Ms Dalal says, "Several ministries, financial sector regulators, Competition Commission of India and Indian Banks’ Association were consulted by the government, but no employee unions or depositors associations who will bear the brunt and are the largest stakeholders were consulted."
 
She also explained major differences between FRDI and FSDR bills. “The much criticised bail-in provision (in FRDI bill) has been removed and instead RA would be empowered to cancel or modify liabilities subject to safeguards in the FSDR. The insured deposit liabilities would not be cancelled or modified. Even internationally, insured deposits or those below a minimum threshold are not touched by ‘bail-in’. However, if the RA can ‘cancel or modify’ liabilities, then it is just another way of saying that the deposits will not be paid (cancelled) or can be converted (modified) into equity capital."
 
In the FSDR bill, while the higher insurance limit for deposits is not mentioned, media reports speculate it to be Rs15 lakh. "As per the secret note, a decision to simultaneously increase the deposit insurance cover from Rs1 lakh to a higher amount may be taken and that increased amount would be the floor for deposit insurance cover. The Resolution Authority would have power to modify this deposit insurance limit”.
 
"Can PSBs and cooperative banks afford higher premium cover on say Rs5 lakh or more in the current model? Banks, including cooperative banks will pay risk-based premium. Will this be on total deposit of insured deposit?" Ms Dalal asked.  
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    COMMENTS

    gcmbinty

    1 month ago

    My comments are directed at Friends in Consumer Protection. I have often said that “Competition is the main stay of the free market. Search for ‘Imperfections’ and ‘Failures’ in the market is the mainstay of Consumer Protection Movement of which you are the Masters.” And, this has been well proved by Sucheta Dalal in her presentation on 'Money Traps That Decimate Savings & the Revised Financial Sector Development & Resolution Bill 2019 (FRDS)" at Moneylife Foundation yesterday, January 17, 2020.

    I hope the Govt of India in the Department of Consumer Affairs will take notes and lead in telling the Regulators in various economic segments where they have started Consumer Protection, Education & Development Funds (which have presently no meanings) to go to Moneylife Foundation to learn a lessor or two in imparting awareness among consumers, that is missing from their curricula.

    Consumer activists across the country will please access the article, read it at least twice, and include the same in their consumer education and awareness programmes.

    SAMUEL LAIWAT WARBAH

    1 month ago

    Moneylife is always at the forefront in enlighting customers.

    Harish

    1 month ago

    Madam, your presentation has covered several important aspects. I feel that you should organise such presentations before University/College students also.

    B. Yerram Raju

    1 month ago

    This Bill like many provides for rules to take care of. Such rule-based Acts provide scope to bureaucracy to play with the Act to the detriment of the interests of the subjects of the Act. Further, the discussions held were with the supply system and not the demand system. Customers and Deposit groups do not form part of consultative process of such a Bill. The Bill should have a regulatory impact assessment as important chapter to prevent such onslaught whereby at the beginning of the year, the first Parliament session should have presentation from the related Minister to present the impact the Bill had on the subjects of the Act and if necessary the amendments to the Act proposed. The Bill also appears to be silent on the qualifications and credentials of the RA and whether he would have the judicious mind to apply the provisions of the Act.

    REPLY

    Harish

    In Reply to B. Yerram Raju 1 month ago

    Agree.

    Ramesh Poapt

    1 month ago

    Great! But the safe alternatives not given. (safe asset allocation).

    PMC Bank Scam: SC Stays Bombay HC Order for Release of Wadhawans from Arthur Jail
    The Supreme Court on Thursday stayed an order passed by the Bombay High Court for releasing Rakesh Wadhawan and Sarang Wadhawan, both promoters of Housing Development and Infrastructure Ltd (HDIL) in the multi-crore Punjab & Maharashtra Cooperative (PMC) Bank fraud.
     
    A bench comprising chief justice SA Bobde and justice BR Gavai and justice Surya Kant took note of the submissions by Solicitor General Tushar Mehta that the High Court order to the extent of allowing their release from prison needed to be stayed.
     
    Earlier, the Bombay HC had allowed the plea of HDIL promoters and directors, Rakesh Wadhawan and Sarang Wadhawan, and had ordered they be shifted from Arthur Road prison to their residences with jail authorities posting two guards at their residences.
     
    On Wednesday, the Bombay HC had decided to set up a three-member committee for valuating and sale of encumbered assets of HDIL to expeditiously recover dues payable by the company to PMC Bank.
     
    In December 2019, Sarang Wadhwan from HDIL had requested the High Court for his release and said, he had no objection if all encumbered properties are sold for recovery of monies payable to the PMC Bank.
     
    In the petition, Advocate Sarosh Damania had contended that "the properties of companies owned, controlled, promoted or managed by Wadhwans are already attached by the enforcement directorate (ED) and economic offences wing (EOW) of Mumbai police and if normal procedure as provided under the relevant rules and regulations is to be followed, it would take years together to repay the deposits of PMC Bank, and therefore in the interest of justice, the said properties must be auctioned under the supervision of the retired judge of this Court (Bombay HC) or the Supreme Court."  
     
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    COMMENTS

    valentine barboza

    1 month ago

    Poor investors of pmc bank are suffering day In and out on account of this father son duo.. even after the sale of their properties and money returned to investors they should be put behind bars for 30 years at least .. they can bribe judges and politicians to be out.. this is the irony of the poor .. what a shame ? The judge who passed the order for their release should see how investors are suffering.. how many have died? They should be tried for murder as well... keep them in ...

    Veeresh

    1 month ago

    Update - Supreme Court stays the release part of the order and so they continue being jailed in jail.

    Will FRDS-2020 Get Timing and Details Wrong Again? Backdoor ‘Bail-In’ Vague and Worse
    We are already into 2020, so the ‘secret’, re-worked Financial Sector Development and Regulation (Resolution) Bill, 2019, or FSDR, is already outdated. There is immense speculation that the new Bill will be pushed through the Cabinet and introduced in the Budget session of Parliament. But will the government trigger panic again by fudging the bail-in provision and getting the timing all wrong? 
     
    The earlier version of this controversial Bill—Financial Resolution and Deposit Insurance Bill, 2017 (FRDI)—was withdrawn in August 2018, “for further comprehensive examination and reconsideration,” after the ‘bail-in’ provision triggered major panic among depositors. Three years later, the situation is actually worse. Consider this.
     
    Yes Bank, India’s fourth largest private bank, is struggling to recover from the dubious banking of its founder promoter Rana Kapoor. The Bank is unable to raise funds from credible sources because investors believe that it is still not sharing the full extent of the problem. Meanwhile, a drumbeat for nationalisation of the Bank looted by private sector industrialists has started.  
     
    In December 2019, a Macquarie Research report, titled “Nationalisation Looms”, pushed for its merger, presumably with a PSB (public sector bank). The report pointed to the forced merger of Global Trust Bank with Oriental Bank of Commerce, nearly 20 years ago (after Ramesh Gelli’s dalliance with scamster Ketan Parekh and various industry houses, including the Zee Group, brought it to the brink). In 2013, United Western Bank, which was under moratorium, was merged with IDBI Bank. The merger was proposed in 2006. Before that, there have been 26 forced mergers with PSBs since nationalisation. 
     
    Well, IDBI Bank did not recover from this disastrous move; it has had to be bailed out by Life Insurance Corporation of India (LIC) which acquired a 51% stake. IDBI Bank remains under ‘Prompt Corrective Action’ (PAC) by the Reserve Bank of India (RBI) and the cost of keeping it afloat is massive.
     
    On 22 December 2019, a PTI report said, “Earlier this month, Finance Minister Nirmala Sitharaman said the recapitalisation was done by the government by infusing Rs21,157 crore into IDBI Bank since 2015; after we came back to power and LIC infused Rs21,624 crore. So both, put together, have given Rs42,781 crore to the Bank. This has helped reduce the net non-performing assets (NPAs) from a peak of 17.3% in September 2018 to 5.97% in September 2019.” 
     
    The cost of this bailout has been a stupendous Rs42,781 crore, and counting, until it finally comes out of PCA.
     
    On 13th January, Andy Mukherjee of Bloomberg suggested that State Bank of India (SBI), our largest PSB should be prevailed upon to ‘swallow’ Yes Bank. This was after yet another board member resigned making a string of allegations and demanding a forensic audit. He wrote, SBI “can always be given some taxpayers’ funds to help with the indigestion.” But, unlike LIC, SBI is a listed entity. What about the blow to its shareholders? Why should they be forced to take a blow to rescue a private bank, whose founder gets away scot-free along with the beneficiaries of his dubious lending?
     
    The buck for Yes Bank stops at the RBI. A banker, who thinks Yes Bank is in a ‘death spiral’ says, “RBI needs to be hauled over the coals here. Many of us bankers knew that the numbers Yes Bank and Rana Kapoor were reporting were absurd. How did the RBI sleep for so long?”
     
    He also says that Yes Bank is unable to get new funding because of fears that it is still hiding some of the bad loans. The same banker says that Yes Bank still refuses to provide “written confirmation on our due diligence questions regarding asset quality” and offers only verbal assurances. Private equity funds, who could have been potential investors, share this view. Isn’t it ironical that lenders and investors continue to suspect that Yes Bank is hiding more skeletons in its cupboard long after the R Gandhi, a former RBI deputy governor, was appointed to the board in May 2019?
     
    Yes Bank responded to this in a press statement on 15 January lambasting “unsubstantiated and irresponsible press/social media speculation.” It ‘firmly’ assured customers about its ‘liquidity and stability’ and asked them to ‘pay no heed to these unfounded reports’.  
     
    Meanwhile, RBI, which ought to clarify the situation and calm customers, remains a silent spectator. It remains just as silent about the fate of Punjab and Maharashtra Cooperative Bank (PMC Bank), which was defrauded by Housing Development and Infrastructure Ltd (HDIL) to the tune of Rs6,700 crore.
     
    In an interesting twist, Nationalist Congress Party (NCP) supremo, Sharad Pawar met minister of state for finance, Anurag Thakur, on 13th January about reviving the Bank, when the ruling Bharatiya Janata Party (BJP) has been cold to every suggestion about a revival.
     
    This is ironical because HDIL and the equally beleaguered Dewan Housing Finance Ltd (which are de-merged and separate entities of the same Wadhawan family) are considered close to NCP leaders by realty industry sources.
     
    Will the government go ahead and introduce the FRDS Bill in this environment? The need for a financial resolution process and even a ‘Resolution Authority’ (RA) for the financial sector is undeniable -– but the weakest part of the ‘secret’ draft remains the section about deposit insurance and safety of depositors’ money. 
     
    The Bail-In Fudge
    The proposed RA under FRDS will include all five financial regulators who have repeatedly failed in their supervisory role in the present financial crisis. So there is no provision for any regulatory accountability in the new set up, except to pass the buck on to customers and depositors.
     
    The briefing note, prepared by economic affairs secretary Atanu Chakraborty, is also very economical with the truth about the ‘bail-in’ provision. 
     
    Bail-in is a process where depositors’ money above a certain threshold (usually covered by deposit insurance) is converted into equity to recapitalise a failed bank. This is to ensure that taxpayers’ funds are not touched for bailing out failed banks and financial institutions. 
     
    The secret note, reviewed only by Moneylife, lists three major differences between the FRDS 2019 and FDRI 2017. Here is what the note says and why it is worrying. 
     
    1. “The much criticised bail-in provision has been removed and instead Resolution Authority would be empowered to cancel or modify liabilities subject to safeguards. The insured deposit liabilities would not be cancelled or modified.” 
     
    Well, even internationally, insured deposits or those below a minimum threshold are not touched by ‘bail-in’; otherwise, people will not trust banks. Further, if the RA is allowed to ‘cancel or modify’ liabilities to depositors, it is just another way of saying that the deposits won’t be paid (cancelled) or can be converted (modified) into equity capital. In effect, there is no change whatsoever. 
     
    2. “Simultaneously, a decision to increase the deposit insurance cover from Rs. 1 lakh to a higher amount may be taken and that increased amount would be the floor for deposit insurance cover. The Resolution Authority would have power to modify this deposit insurance limit.” 
     
    This vague assertion is a whole new can of worms. Insurance of any kind is based on actuarial science which examines data about claims over a period of time to determine premium. The FRDS Bill says that banks, including cooperative banks, will pay risk-based premium and, yet, does not bother to specify how much of the deposit will be covered by insurance. It also makes the stunning suggestion that the RA can ‘modify’ this deposit insurance limit. Will it be done on a case-by-case basis? 
     
    Experts tell us that the deposit insurance model will be in a shambles even if the Deposit Insurance Guarantee Corporation does not collect premium on the entire deposit and expects cooperative banks to pay risk-based premium. In any case, a discussion note ought to have spelt out details and also specified the increase in deposit insurance under the new resolution corporation that will be set up. 
     
    3. “Resolution of public sector banks (PSBs) to be done in consultation with the Government.”
     
    This statement also raises several questions. If the government continues to hold a majority stake in PSBs, where is the question of ‘resolution’? Or will we have an incongruous situation where a sovereign guarantee will not apply to government-owned entities? If yes, this will only trigger another round of panic. 
     
    According to Mr Chakrabarty’s note, the Bill has been discussed with the ministries of corporate affairs, social justice and empowerment, tribal affairs, departments of agriculture, cooperation and farmers’ welfare, expenditure, revenue, financial services, national commissions of scheduled castes and scheduled tribes, financial sector regulators, Competition Commission of India and Indian Banks’ Association.
     
    The largest stakeholders, we, the depositors, who will be most affected by the Bill have been left out; even bank employees and their representatives have not been consulted. 
     
    Most Indians have their core savings in bank accounts and the fear that deposits may be in jeopardy is already causing a lot of stress. Given the government’s record of hasty decisions and missteps, it would be a good idea to put the Bill out in the public domain, seek feedback, take on board the positive suggestions and then come up with legislation that will allow resolution of financial entities without triggering panic among people.

    You may want to watch this video from Moneylife News Bites

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    COMMENTS

    ANIL GOPAL SHINDE

    1 month ago

    Bank Depositers have always been at the receiving end. There is an urgent need for safeguarding the hard earned money by people. The loot by various industrial houses & politicians is in public domain for long. In most of the cases, it's the common man that suffers. This should end somewhere.

    Seshadri Rajagopalan

    1 month ago

    Whar will be the status of FCNR deposits by non resident Indians?

    Ramesh Poapt

    1 month ago

    will the bill be finally passed? opposition/protest will
    not allow it for sure.

    S Balakrishnan

    1 month ago

    Attaching bank depositors' funds for absolutely no fault of theirs makes a mockery of bank licences.
    This bill will trigger panic in the fin system

    SuchindranathAiyerS

    1 month ago

    As always an excellent analysis. The underlying problem, of course, is the Colonial - Totalitarian nature of India's tyranny where "Caesar's wife" i beyond accountability and the Judges, RBI, IAS, IFS, IPS, IRS, MLA, MP etc go Scot free after failing to do their job which is to protect the interests and security of India citizens. The Colonial-Totalitarian construct is that the ruling tyrants need only protect themselves.
    I am indebted to Moneylife.

    leo stanley

    1 month ago

    Target is always middle class for bjp. they will kill the RBI by taking dividend money and banking system soon die with this bill.

    They like to kill this saving habbit for Indians.

    they need to find process for not to make now banks. not killing deposit ors

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