Finance Minister Arun Jaitely allayed worries that a “bail-in” provision allows depositors’ money to be used by weak institutions to pay out of a total collapse.
A proposed law which the government claims will help contain the impact of a failing bank is also designed to protect the rights of depositors, Finance Minister Arun Jaitley has said to allay worries that a “bail-in” provision allows depositors’ money to be used by weak institutions to pay out of a total collapse. The Financial Resolution and Deposit Insurance (FRDI) Bill has been referred to a joint committee of parliament that will give its report in the winter session starting December 15.
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“The Financial Resolution and Deposit Insurance Bill, 2017 is pending before the Standing Committee. The objective of the government is to fully protect the interest of the financial institutions and depositors…The government stands committed to this objective,” Mr Jaitley has said.
The assurance came as an an online petition by a Mumbai woman against allowing “a government entity to use depositors’ money to save a bank on the verge of bankruptcy” got over 40,000 sign-ups in just 24 hours.
The petition appeals to the Finance Minister not let the FRDI bill pass with the ‘bail-in’ provision, stating, “Our hard earned money that we have saved for our children and for our future will be used to bail-in the banks.”
Some financial analysts have suggested that “bail-in”, as against bailout in which outside money is used to save a financial institution, may eat into funds parked by depositors.
Opposition parties have alleged that the government could use people’s money to save financial institutions that have made bad lending calls. Banks are struggling under the burden of bad loans of around Rs 10 lakh crore ($150 billion).
Economic Affairs Secretary SC Garg has asserted that the proposed law does not dilute the protection depositors currently have. “Instead it enhances present protections in certain ways. Principal guarantee for PSU Banks’ depositors come from government ownership which also remains completely unaffected,” he said
The FRDI Bill is part of a larger, more comprehensive approach by the Centre towards systematic resolution of all financial firms — banks, insurance companies and other financial intermediaries. The Bill comes together with the Insolvency and Bankruptcy Code to spell out the procedure for the winding up or revival of an ailing company.
The need for a specific regulation rose following the 2008 financial crisis, which witnessed a large number of high-profile bankruptcies. With the Centre also actively encouraging people to engage more with the banking sector — both through schemes like Jan Dhan Yojana and moves like demonetisation — it becomes critical to protect savers and those joining the formal economy in case a bank or insurance firm starts failing.
Among other tools, the FRDI Bill also empowers the Corporation to bail-in the company. While a bail-out is the use of public funds to inject capital into an ailing company, a bail-in involves the use of depositors’ funds to achieve those ends. This can be done either by cancelling the bank’s liabilities, or converting them into other forms, such as equity.
This has caused a lot of concern among depositors who are worried they may lose their hard-earned money deposited with banks. However, the fact is that the risk is no more or no less than it ever was. The Deposit Insurance and Credit Guarantee Corporation provides deposit insurance of up to ₹1 lakh. The rest is forfeited in the event of a bank failure. The FRDI Bill has not specified the insured amount yet, but it is unlikely to be lower than that amount, as the limit was set way back in 1993.
The government has also said that, “Indian Banks have adequate capital and are also under prudent regulation and supervision to ensure safety and soundness, as well as systemic stability.”
Currently, people’s deposits of up to Rs 1 lakh are insured under the Deposit Insurance and Credit Guarantee Corporation Act, 1961, if a financial institution were to fail. Depositors are concerned that the proposed “bail-in” provision might remove that protection.
The FRDI Bill, 2017, tabled in the Lok Sabha on August 11 in the monsoon session, provides for an independent regulator, the Resolution Corporation, which will comprise representatives from other financial regulators such as the Reserve Bank of India and the Securities and Exchange Board of India.
Bank unions have opposed the bill as they fear the new authority may get powers to fundamentally change how public sector financial institutions function.