The proposed Financial Resolution and Deposit Insurance (FRDI) Bill has generated a lot of noise with bankers threatening to go on strike if the Centre proceeds on the proposed legislation. This article looks at the FDRI Bill, its provisions and what it means to a bank depositor.

By Girish Baga, Educationist

At the outset, there are many social media messages talking about FRDI Bill. Off late, mainstream media too is focusing on the Bill that will likely to be tabled in the Parliament soon.

As a common man, I am worried about my deposits in banks. Is there a reason to worry? After all, the trust in the banks is the essence of Indian economy for most people. Every Indian perceives these PSBs (Public Sector Banks) as their messiah especially towards their retirement age where savings matter.

There is a saying which is popular among insurance circles: “Living too long is as riskier as living too short.” In a country where there are underdeveloped social security financial instruments like health, insurance and pension schemes, the only instrument which has repeatedly given confidence for an Indian is undoubtedly bank deposits.

Now imagine a situation when these deposits are under threat and how ordinary citizens of this country will feel. Though as of now many people have not taken this FRDI Bill seriously, it can change the way people think. The Bill can prove detrimental to the present government.

Let us understand the arguments in favour as well as against the Bill.

What can this FRDI Bill do to you?

The FRDI Bill is a part of financial reforms recommended by Justice. B.N. Srikrishna towards resolution of all financial firms like banks, insurance companies, depositories, etc. The objective is to set up a “Resolution Corporation” to monitor and assess risks confronted by financial institutions and resolve them in case of their failure in the market.

The law envisages a quick solution unlike in the past which took many years for resolution. If you remember late 90’s, most of the Non Banking Financial Companies (NBFCs) went bust and the poor depositor had to run from pillar to post for his money with no solution at sight.

The solution could be to sell the firm within 6 months to recover the loss or merge with another company and at times close it down without disturbing the economy and also protecting the interests of the investors and various stakeholders.

Normally during the times of failure or crisis, banks were bailed out by third parties and generally the third party would be the government in most of the cases.  This is also known as ‘Bail out’. With the intervention of the government, the ailing banks were rescued using tax payers’ money. This kind of sovereign guarantee always increased the confidence level of the depositor.

In the past, governments intervened and compelled strong banks like Oriental Bank of Commerce to take over the ailing Global Trust Bank by protecting the interests of the depositors. Along with this, insurance coverage of Rs. 1 lakh was given to each depositor per bank, irrespective any amount of deposits – though this was never debated all these years. When we compare the insurance coverage with G20 countries, our deposit-linked insurance is dismally low with almost 1/60 of their present practice.

The FRDI Bill is a hot topic for discussion in India today. The bone of contention is Section 52 of the Bill which mentions ‘Bail in’ clause. How is it different from ‘Bail out’ clause? Section 52 of the Bill says as below:

Bail-in

52. (1) Notwithstanding anything contained in Section 49, any action taken by the Corporation pursuant to this section may be through a bail-in instrument or a scheme under Section 48 the form and manner of which shall be specified

(2) The bail-in instrument may contain:

(a) A bail-in provision or

(b) A provision for the purposes of, or in connection with, any bail-in provision made by that or another instrument.

(3)  A bail-in provision means any or a combination of the following:

(a) A provision cancelling a liability owed by a covered service provider

(b) A provision modifying, or changing the form of, a liability owed by a covered service provider

(c) A provision that a contract or agreement under which a covered service provider has a liability is to have effect as if a specified right had been exercised under it.

(4) (a) For the purposes of clause (a) of sub-section (3) of this section cancelling a  liability owed by the covered service provider includes cancelling a contract under which the covered service provider has a liability.

(b) For the purposes of clause (b) of sub-section (3) of this section

(i) Modifying a liability owed by covered service provider includes modifying the terms or the effect of the terms of a contract under which the covered service provider has a liability.

(ii) Changing the form of, a liability includes:

• Converting an instrument under which the covered service provider owes a liability from one form or class
• Replacing such an instrument with another instrument of a different form or class
• Creating a new security, of any form or class, in connection with the modification of such an instrument

(5) The corporation may specify the liabilities, or classes of liabilities of a covered service provider, which may be subject to bail-in.

According to the content above, the liabilities refer to the deposits of the customers held in the bank. For a bank, deposits are the liabilities and loans are assets. Now what is ‘Bail in’ clause which is causing so much anxiety?

We have understood what ‘Bail out’ clause is wherein with the government intervention, ailing banks were rescued with the help of tax payers’ money. ‘Bail outs’ were criticised for using public funds due to the mismanagement of such banking entities. This leads the governments across the globe to explore newer avenues to address this problem. The initial discussions were started by G20 countries way back in 2011. Regulatory bodies across the globe started working on a formula.

The Bill proposes that the losses of these banks or any financial firm have to be borne by the shareholders and creditors rather than tax payers.  The tool which addresses such resolution is ‘Bail in’ clause which implies that losses can be written down by bank’s equity and debt – at times, converting debt into equity. This overrides shareholders consent too.

What it means to a depositor?

1. Fixed deposits can be used as collateral during times of distress to raise money from the market until then you don’t have right on your own deposits.
2. Fixed deposits can be converted to savings deposits to lower the rate of liability (interest rates)
3. Cancelling the term and rates of fixed deposits with the sole discretion of the bank
4. It can be combination of any of the above

What are we talking about? Does it make any sense?

The government says when you move a system there is always period of adjustments. As Indians, are we destined to make adjustments forever? We agree that the Bill wants to put in a few rules. This is an era of competitive market filled with both public and private players. Contemporary banking is faced with lot of challenges. The FRDI Bill wants to identify the ill health of such financial firms at an early stage and bring in resolution. Therefore the need for a warning system and resolution process is required. So financial firms including banks will be categorised according to their risk profile and suitable action will be taken by ‘Resolution Corporation’ and ‘Bail In’ clause is one such remedy. The risk profile will be categorised as low risk, moderate risk, material risk, imminent risk to critical risk.

I feel before the government introduces such scary provisions like ‘Bail in’ clause in the Bill, it should be open to categorise banks according to their risk profile immediately and rejig their management structures which aligns to contemporary practices globally. It should then leave it to the depositors to choose the banks of their choice.

Though the depositors according to FRDI Bill cannot be a part of the ‘Bail in’ deposit category without their consent, do we actually read the fine lines of ‘terms of conditions’ in any aspect of our daily life? Also, the government must revise deposit linked insurance to logical levels. The limit of Rs. 1 lakh was set in 1993 and none of the governments saw the necessity to revise even after 24 years. But you want to compete globally without bringing in changes which is pure common sense.

You set interest rates according to market conditions but ignore the insurance coverage. This also talks about the poor sense of consumerism among people. We wonder what the opposition parties are doing when such insensitive provisions are made in the Bill.

The government’s strategies with respect to ‘Bail in’ clause are very much similar to EU countries like Cyprus where bank depositors lost 47.5% of their deposits. Already banks in India are riddled with huge levels of Non-Performing Assets (NPA).

The intent may be good but this Bill is definitely not the priority at this point of time. Let the government concentrate on burning issues in financial sectors like huge NPA levels. It is apt for the government to debate on this further and table the Bill. The Bill is currently being examined by Joint Committee of both the houses of Parliament.