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Financial Sector Development and Regulation (Resolution) Bill, 2019, or FSDR, is already outdated.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The earlier version of this controversial Bill—Financial Resolution and Deposit Insurance Bill, 2017 (FRDI)—was withdrawn in August 2018, “for further comprehensive examination and reconsideration,” after the ‘bail-in’ provision triggered major panic among depositors.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.