The Farce of Insured Bank Deposits and Return of Financial Resolution and Deposit Insurance (FRDI) Bill
Finance Minister (FM) Nirmala Sitharaman’s announcement on 15th November -- that the government plans to increase the deposit guarantee limit -- has triggered an important debate over the safety of bank deposits and who will pay the price for deposit insurance.
 
The announcement may be accompanied by a return of the controversial Financial Resolution and Deposit Insurance (FRDI) Bill.
 
The Bill, introduced in the Lok Sabha in August 2017, was withdrawn in August 2018, after it triggered panic among depositors and a run on loss-making public sector banks (PSBs), despite the implicit sovereign guarantee because of their ownership.  
 
The need for a robust financial resolution mechanism is not in doubt, but creating such a mechanism without fixing issues of ownership, safety and regulatory accountability is what alarmed depositors. The attempt to ram the Bill through parliament without dialogue or discussion was primarily responsible for the fright that it caused. 
 
The government’s propaganda machine, operating through the mainstream media, is busy drumming up support for FRDI 2.0. These media reports attribute the withdrawal of the FRDI Bill in August 2018 to ‘ill-informed social media chatter’, ‘television debates’, ‘misinformation’ and a ‘misplaced campaign that depositors’ money would be used to bail out failed banks’. 
 
The sweeping falsehood behind these charges is astonishing, given that a series of financial sector debacles began almost immediately after the Bill was withdrawn. 
 
It started with the default by Infrastructure Leasing & Financial Services (IL&FS) in September 2018. This conglomerate of 347 companies with an outstanding debt of nearly Rs100,000 crore continues to roil the financial sector. 
 
A blatant example of failed supervision, hundreds of shadowy IL&FS subsidiaries flew below every regulator’s radar right until it collapsed. And IL&FS was classified as a ‘systemically important’ finance company!
 
Moneylife had reported Dewan Housing Finance Corporation Ltd (DHFL) and its massive mismanagement of funds in December 2018; the Reserve Bank of India (RBI) finally superseded its board of directors only on 20th November. 
 
Then there is Punjab and Maharashtra Cooperative Bank (PMC Bank), felled by Rs6,500 crore of fraudulent lending to the Housing Development and Infrastructure Ltd (HDIL) group. It was discovered in September 2019, only because of a confession by the managing director after things reached a point of no return. 
 
It is yet another example of failed supervision. RBI was clueless, even though a former general manager of its urban banks department was among the top three employees in PMC Bank. Documents obtained under Right to Information (RTI)reveal that RBI’s inspections follow arcane processes and had failed to probe the few red flags that went up.
 
Incidentally, both DHFL and HDIL are part of the Wadhawan family, which separated only 10 years ago. 
 
The Economic Times (ET) points to another issue in an article cheer-leading the return of FRDI. It says that there is ‘chaos in the financial markets’ because “banks, non-banks and mutual funds are dragging in different directions to recover what is due to them — from promoters such as Subhash Chandra of the Zee Group or the Wadhawans of DHFL.” 
 
This, it argues, “makes a perfect case to revive” the FDRI Bill “that was kept in abeyance due to rumour mongering.” 
 
But wasn’t the chaos triggered by the failure of regulatory and supervisory processes?  FRDI 2.0 can, indeed, ‘resolve’ issues; but the fear and turmoil, which is being dismissed as  ‘rumour mongering’, will occur even with a new FRDI Bill, unless regulatory failure is fixed first. 
 
The Securities and Exchange Board of India (SEBI) was caught napping when leading mutual funds forgot that they were investors and became lenders against shares to Zee, Yes Bank and Anil Ambani group companies.
 
They also colluded when these companies failed to disclose the lending to stock exchanges, instead of insisting on it. Instead of punishing them, SEBI is busy tinkering with the rules and net-worth requirements for smaller market intermediaries. 
 
Now let us turn to the wisdom on deposit insurance. Only one private bank (Global Trust Bank) has failed in the past 25 years after economic liberalisation. Deposit insurance was last raised after the securities scam of 1992 (from Rs30,000 to Rs100,000), mainly to cover RBI’s failed supervision, after two small banks collapsed.
 
The government wants to make FRDI 2.0 politically palatable by hiking deposit insurance to Rs15 lakh. The ET report says that this will cover 90% of individual deposits and that the cost of insurance “could be deducted from the interest offered to depositors.” 
 
This is a big change from current structure, where the Deposit Insurance and Credit Guarantee Corporation (DICGC) insists that premium must be paid by banks from their own funds and not by depositors. 
 
Consequently, deposit insurance premium would rise, every time DICGC has to makes a big settlement and depositors will have to sacrifice interest income to cover the cost. 
 
Interest on savings accounts is already a low 3.5%, while that on term deposits has slipped below 7%. Both are set to fall further. This will hit the vast millions, including senior citizens, who live on interest income and have no government pension or social security to fall back on. 
 
On 18th November, the All Indian Bank Depositors Association (AIBEA), India’s largest bank unions, jumped into this debate by demanding that PSBs should not be asked to contribute to deposit insurance, since they are covered by a sovereign guarantee.
 
AIBEA says the aggregate deposits of PSBs are Rs72 lakh crore, of which only Rs22 lakh crore are covered by insurance, but premium is collected on the entire amount. In 2018-19, DICGC collected a premium on Rs120 lakh crore of deposits, although only 28% of them (Rs33.70 lakh crore) were insured. 
 
While AIBEA is agitated about PSBs paying insurance for ‘deposits that are not covered’, the irony is that every Indian is paying for the massive mismanagement of banks, which caused bad loans to balloon to over Rs10 lakh crore. The exchequer has pumped in over Rs3 lakh crore into PSBs in the past five years alone to recapitalise banks, in addition to multiple ‘recapitalisation’ exercises in the past. 
 
AIBEA’s letter also supports my contention that the flawed deposit insurance guarantee scheme is only viable because of the hefty premium collected from PSBs and successful private banks. 
 
 
DICGC is sitting on premium collected of Rs97,350 crore, when the sum total of its insurance pay-out, since 1962, is just Rs5,120 crore. This was almost entirely for settling dues of cooperative banks. Most cooperative banks are not only under dual regulation (RBI and the Registrar of Cooperatives), but are regularly controlled and exploited by politicians. 
 
The premium collected from PSBs is, indeed, risk-free and unnecessary. If PSBs are exempted from paying insurance, the whole edifice of deposit insurance cover will crumble, especially if cooperative banks are asked to pay risk-based premium as recommended by several committees set up by RBI. 
 
A retired PSB chairman tells me, “If an effective insurance risk/actuarial model is used to measure, it will be very clear that DICGC can’t manage the burden of insuring the bank deposits of even up to Rs 1 lakh.” He also agrees that merely increasing deposit insurance (to Rs15 lakh) ‘only adds to moral hazard’, if regulators, lenders and depositors remain just as reckless. 
 
Compulsory conversion of cooperative banks into commercial banks, and the closure of tiny, unlicensed ones, is imperative before any FRDI Bill can be seriously considered. 
 
The core of the FRDI Bill will be a powerful Resolution Corporation (RC) to conduct the financial resolution process. RC will be able to “access information, terminate, transfer, sell the institution at its discretion.” It will also decide on invoking the ‘bail in’ provision where a part of the deposits above a certain threshold (which is covered by a deposit insurance) can be compulsorily converted to equity to capitalise the bank and keep it going. This provision had triggered serious panic earlier. 
 
There are many legitimate questions that need to be answered and some fundamental legislative and policy changes put in place before a re-worked the FRDI Bill can be foisted on us without a repeat of the 2017 reaction.
 
The status of such disaggregated depositors, especially those with business accounts and large deposits, is one such concern. Will they be treated as unsecured creditors and be the last in the queue (just ahead of equity-holders) when it comes to financial resolution? Or will these be equated with home-owners, who are considered secured creditors, after a Supreme Court verdict?
 
To dismiss such worries as rumour mongering is arrogant and irresponsible, given that the government has made no attempt to explain the Bill to people. 
 
As depositors, our primary concern is, indeed, the safety of our savings. That will happen if there is regulatory accountability and strict supervision of all intermediaries that are entrusted with a fiduciary responsibility to protect depositors’ money. Without it, anther FRDI experiment would also fail.
 
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    COMMENTS

    VIVEK SHAH

    2 months ago

    I completely agree with your statement that the ruling party's social media team would go on a overdrive to spread misinformation.

    manojkamrarti

    2 months ago

    Well said-Compulsory conversion of cooperative banks into commercial banks, and the closure of tiny, unlicensed ones, is imperative before any FRDI Bill can be seriously considered.

    RALPH VICTOR RAU

    2 months ago

    PM Modi Government helped itself to a special dividend from RBI amounting to Rs 1.23L Cr

    DICGC is sitting on reserves of 97,350 Cr

    This means had Government not helped itself to the special dividend there would have been over 2.0 L Cr of reserves more than adequate to cover a capital erosion of several banks.

    We must note here that private sector banks have Tier 1 Capital around 10% of their Balance Sheet. Assuming RBI is doing its job, the risk to a private banks balance sheet would be highlighted well before its NPA hole reaches 10% of its Loan Assets.

    Assuming that NPA spirals out of control it may reach 20% of Loans. This means the first 10% would be the Equity holders responsibility and Equity holders would be wiped out. The remaining 10% would have to be taken from Banks depositors with each depositor loosing pro-rata 10% of their deposits.

    This means that in a dire situation of 20% Loan Asset loss a depositor would get back 90% of their deposits.

    The depositors need to weigh the loss of 10% of their deposits (in excess of the DICGC insured amount) against the option of keeping their cash in a mattress.

    Harish

    2 months ago

    Excellent Article !

    Nakul Kumar Reddy

    2 months ago

    With Ur helping hand I will start business in small amounts .

    Mallya's Kingfisher House to again go under the hammer for 8th time in 3 years
    The Kingfisher House -- the erstwhile headquarters of the defunct Kingfisher Airlines Ltd. (KAL) - owned by absconding liquor baron Vijay Mallya, will be up for auction again. The 8th time in barely three years.
     
    The Debts Recovery Tribunal (DRT), Bengaluru, has announced a new auction date of November 27 through an online bidding process, for the beleaguered property.
     
    From the original reserve price of Rs 135 crore during the first auction of the property -- valued at around Rs 150 crore in 2016 -- for the 8th auction this time, the reserve price is fixed at a staggeringly low of just Rs 54 crore, a sharp drop of 60 per cent.
     
    The building, originally known as Paradigm, and later as Kingfisher House, includes a basement, an upper ground floor, a ground floor and an upper floor which are now up for sale, totally measuring 1,586 sq metres.
     
    It is situated on a plot measuring around 2,402 sq. metres in a coveted location, bang outside the Chhatrapati Shivaji Maharaj International Airport (CSMIA).
     
    Experts say an important factor affecting the property sale is the massive encroachment -- of around 725 sq. metres -- giving a net saleable area of just 1,677 sq. metres.
     
    Another consideration weighing the minds of the potential buyers is limited scope of redevelopment or exploiting it in future owing to the height restrictions on building constructions as it falls in the vicinity of the CSMIA, among the busiest in the country.
     
    However, market players caution that if the reserve price of such premises are slashed repeatedly in this manner, it tends to give a bad reputation to the prime property and buyers would shy away from it in future.
     
    The sale is part of the efforts to recover Rs 6,203 crore plus interest from June 2013, which are demanded by a consortium of bankers led by the State Bank of India and others.
     
    The first of the auctions was ordered by the DRT Bengaluru in 2016 with a reserve price of Rs 135 crore and the last (7th) one was held in March 2018 with a reserve price of Rs 75 crore.
     
    The prospective buyers will have to contend with an additional expenditure of Rs 1.55 crore of unpaid property taxes, due to the BrihanMumbai Municipal Corporation (BMC), allegedly unpaid since the past over three years.
     
    A former Rajya Sabha Member, Mallya -- who sneaked out of the country around early 2016 -- is currently living in London, United Kingdom since.
     
    In Dec 2018, a UK court ordered his extradition to India which he has challenged on grounds that the cases against him are 'politically motivated', though Indian authorities are optimistic he will be brought back to face the law soon.
     
    Presently, he has non-bailable arrest warrants in several cases from different courts in India, including Maharashtra, Karnataka and Andhra Pradesh.
     
    In April 2016, a Mumbai Special Court had summoned him for hearing in cases of alleged money-laundering of Rs 4,000 crore, but he never showed up.
     
    The Enforcement Directorate (ED) stepped into the picture in June 2016 by attaching some of his assets valued at Rs 1,400 crore, and later another attachment order on his farmhouse, shares in his companies, flats in Bengaluru and other assets.
     
    So far, the ED has attached more than Rs 9,600 crore worth of his Indian assets and has initiated the process to seize his foreign assets in the United State, United Kingdom and Europe among a few other countries.
     
    Incidentally, so far the authorities have succeeded in selling Mallya's reputed 'Kingfisher Villa' in Candolim Beach, Goa, to a Marathi actor in a negotiated deal of around Rs 73 crore after multiple auction deals failed.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    Newme

    2 months ago

    ED has seized more than 9600 Rs crores of his assets. Isn\'t that more than his loan defaults? Why did he run away then?

    Sanjeev B

    2 months ago

    Please tell me how does this qualify as a "Prime Property" if 33% of it is encroached?

    Nakul Kumar Reddy

    2 months ago

    Vijay malya is a scoundrel, he needs only money .
    Notorious criminal .
    His team along with son must be arrested.
    Cheater's family

    PMC Bank Fraud: RBI Says the Bank Submitted Fraudulently Manipulated Data on HDIL Loans
    The Reserve Bank of India (RBI) has virtually admitted that it was 'cheated' by the management of the scam-hit Punjab & Maharashtra Cooperative (PMC) Bank.
     
    Especially, RBI says PMC Bank had submitted fraudulently manipulated data to the central bank for sample checks, but the sample of accounts picked for inspection did not contain undisclosed accounts of Housing Development and Infrastructure Ltd (HDIL) group companies.
     
    In its affidavit submitted to the Bombay High Court, the central bank says, "The disclosed HDIL related accounts were seen and majority of them were assessed as non-performing assets (NPAs). Further non-monitoring of end use of funds and conflict of interest of Waryam Singh as chairman of PMC Bank and as a former director of HDIL group was also commented upon in the report along with the attempt by the bank to show disclosed accounts of HDIL group as standard by sanction of new loans to close or regularise the old NPA accounts... Consequently, the assessed NPAs of the Bank were significantly higher than the reported NPAs."
     
    "The Bank had also sanctioned mortgage overdraft limits to a wholly-owned subsidiary of the HDIL while the present (now arrested Waryam Singh) chairman of PMC Bank, was also a director of the company -- a clear conflict of interests and violation of the RBI's Master Circulars... Waryam Singh also chaired a PMC Bank board meeting to ratify the approval of mortgage overdraft in which he was directly interested, again contravening RBI norms."
     
    "The inspection team had also established the relationship between the chairman of the Bank and HDIL promoters, which might have acted as the primary consideration for sanction of credit facilities and resulted in their utilisation to pay off one-time settlement dues with other landers," RBI says.
     
    Moneylife had raised the issue of conflict of interest of Waryam Singh and HDIL promoters. We had written about the association between Mr Singh and HDIL group. Waryam Singh’s association with the Wadhwans dates back to 17 January 1997, when he was made director of DHFL Property Services Ltd from where he resigned on 27 March 2009. Before resigning in March-April 2015, Mr Singh had served as director of HDIL for almost nine years. (Read: While RBI Acts Strict about Giving New Banking Licence, How Was a Director of HDIL Group Controlling PMC Bank?)
     
    Coming back to the RBI affidavit, which states that the scale of violation and the connected lending that was established, based on available records, was much lesser due to the 'camouflaging' resorted to by the PMC Bank, and hence what was noted was 'flagged', though it was not found to be significantly affecting the Bank's financial health. 
     
    Few days before its restrictions, on 19 September 2019, RBI sent its team for annual inspection of PMC Bank and thorough scrutiny of HDIL accounts, especially the Bank's exposure to the group. 
     
    Detailing the "modus operandi of hiding the information related to HDIL exposure" employed by the PMC Bank, the RBI affidavit says they (Bank executives) tampered with management information systems and NPC identification process. In this, the Bank had given special access codes on Finnacle, its core banking software (CBS) for HDIL accounts with restricted visibility to less than 25 out of PMC Bank's 1,800 staffers.
     
    RBI says, "While running the script for system identification of the NPAs, it deliberately excluded the HDIL accounts which were thus omitted from the system generated reports of NPA accounts, and ditto with the overdrawn accounts list.
     
    The PMC Bank's own MIS software called 'Opine' had a script for generating lists of newly sanctioned or disbursed accounts, but the undisclosed loan accounts were excluded from this list."
     
    "These irregularities were not highlighted by the PMC Bank's concurrent auditors at the Sion Branch, where all these undisclosed accounts were parked though concurrent audits were carried out every month," the affidavit pointed out.
     
    In addition, the undisclosed loan accounts to HDIL group, sanctioned and renewed with approval from K Joy Thomas, the then managing director (now behind bars) of the Bank. These sanction of loans was not recorded in the minutes of the loan committee, recovery committee, or the board of directors, though they constituted a vital source of information for inspection, RBI says.
     
    Further, the affidavit says, "PMC Bank submitted false information in the returns on single party or group exposures filed through offsite surveillance system (OSS) to the RBI, which again is a document relied upon by the central bank inspectors, by not disclosing large advances relating to the HDIL group that constituted its biggest exposure."
     
    According to RBI, PMC Bank was showing fictitious profits on its books. It says, "...the inspection of the books of the Bank has now indicated huge loss and significant deposit erosion as per preliminary findings of inspection. This was hidden by the Bank by fictitiously showing profits and using the same inter-alia to declared dividend and pay higher salaries. The profit came by treating NPA accounts as standard (non-NPA) accounts by way of 'concealing' major portion of these accounts...for NPAs no profit can be booked till it is actually received, while in case of regular accounts, profits are accounted for the broken period on accrual basis pending actual receipt. Thus, false and non-existent profits were booked by the Bank."
     
    What the RBI had stated in its affidavit is also confirmed in the forensic audit report. The preliminary report shows that PMC Bank never showed HDIL as a bad loan or NPA and the Bank created fictitious accounts to grant loans to the Wadhawan company.
     
    Last week, the EOW arrested Rajneet Singh, son of Sardar Tara Sing, former member of legislative assembly (MLA) from Mulund in the PMC Bank fraud case.
     
    Rajneet Singh was director of PMC Bank before the RBI put restrictions on the lender. He was also on the recovery committee of the Bank.   
     
    The EOW had also arrested Jayesh Sanghani and Ketan Lakdawala, the two auditors who did the statutory audit of fraud-hit PMC Bank. 
     
     Last month, the ED had seized and identified movable and immovable assets worth more than Rs3,830 crore owned by HDIL, the company directors and promoters, as well as official of PMC Bank and others related entities in the fraud case.
     
    The PMC Bank has been put under restrictions by the RBI since September after an alleged Rs4,355 crore scam came to light, following which the deposit withdrawal was initially capped at Rs1,000, causing panic and distress among depositors. The withdrawal limit has been raised in a staggered manner to Rs50,000.
     
    Founded in 1984 by S Gurcharan Singh Kochhar from a small room in Mumbai, the Bank had now grown to a network of 137 branches in six states and ranked among the top 10 cooperative banks in the country.  
     
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    COMMENTS

    P S Krishnan

    2 months ago

    Why should the RBI team that was responsible for monitoring PMC Bank not be sacked and why should their retiral benefits not be redistributed amongst PMC depositors.

    @Sucheta. Why should PMC Bank incur Rs 1 Crore / day on operational expenditure when there are no regular business operations? Employees (lots of them would have been aware of the scam) should be dismissed and the Bank should operate on minimal employees. Priority should be to return Deposits. Since this scam has been pulled off in partnership with or without RBI's involvement, Depositors should be repaid through RBI reserves and when the outstanding amount is realized by PMC administrators, RBI should be paid back by PMC Administrators. Why should depositors suffer for RBI's lapses and why should employees / co-conspirants of the scam receive periodic salaries, same applies to RBI too

    Gopalakrishnan T V

    2 months ago

    RBI seems to havefailed both in its offsite and onsite surveillance and given a long rope and confodence to the PMC banks Directors, Auditors and Executives to play havoc with depositors money mercilessly. This has been going on for decades is a poor reflexion on the regulatory and supervisory system in vogue without any sort of checks and balances allowing the bank to meddle with the Management Information System and violate all sorts of Regulatory Requirements camouflaging all vital and very sensitive data to loot the bank and cheat the depositors and investors. Even, the very fact the Technology in use in the bank has been intelligently manipulated shows how and to what extent the Directors can indulge in the misuse of banks' funds and influence / fool the Regulator and other authorities. It is a new lesson for depositors to be vigilant and for insistence on the need to have depositors' representative on the Banks' Boards. There should be some flow of MIS to some of the Key depositors and their voices need to be heard by the Regulator and other authorities.

    Amarjit Singh

    2 months ago

    RBI, Ed, mumbai police, good job for a/c hold ers

    Mohan Krishnan

    2 months ago

    Why RBI Officials didn't read MONEYLIFE.? All these issues were known. Wadhwan Family's nefarious activities have been known to low IQ readers like us. The only reason RBI did not show any interest was blinding by compromise. Now they are treating DHFL too "softly". Also fooling Judiciary by submitting half truthful and half distorted Affidavit. RBI is i important institution for Crony Capitalism in India ( like FED for Wall street). Abolish RBI.

    Shaol M

    2 months ago

    Now RBI suddently wake up from sleep and sarch original records of bank

    Nakul Kumar Reddy

    2 months ago

    They r cheater's ,file case on them.

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