India achieved a landmark in the second quarter of the last financial year when deposits in Indian banks reached a whopping Rs 100 lakh crore. It was a time to celebrate, especially since the growth of deposits in banks had skyrocketed to Rs 5.32 lakh crore a month, which was more than the total deposits in the banking sector some 20 years ago.
But the celebrations were short-lived as another news emerged from the banking sector, which has created panic among millions of depositors across the country. In June this year, the Union Cabinet, headed by Prime Minister Narendra Modi, approved a bill called 'Financial Resolution and Deposit Insurance Bill, 2017'
The bill was introduced in Lok Sabha in August this year and was sent to a Joint Committee of Parliament.
The Bill proposes to set up a Resolution Corporation to monitor financial firms such as banks, insurance companies and other financial entities, anticipate the risk of their failure, take corrective action, and resolve them in case of such failure. The Resolution Corporation thus established would also provide deposit insurance up to a certain limit, in case of bank failure.
But Sub-section 7 of Section 52 of the Bill sets a cat among the pigeons. Through this section, the FRDI Bill introduces a 'bail-in' provision for the banks to help them utilise the money received through deposits to meet a crisis situation. Experts feel that this provision empowers the banks to override the deposit agreement it has with its depositors, and forfeit deposits in case of bankruptcy.
This bail-in provision has created panic among depositors who feel that their hardearned money will no longer be safe in banks once this bill comes into force. Here is what sub-section 7 of Section 52 of the FRDI Bill says: “The bail-in instrument or scheme under this section shall not affect — (a) any liability owed by a specified service provider to the depositors to the extent such deposits are covered by deposit insurance; (b) any liability that the specified service provider has by virtue of holding client assets. Explanation — In this clause, the expression, “client assets” shall include such assets as may be specified by regulations made by the appropriate regulator; (c) any liability of original maturities up to seven days; (d) any obligation to a central counter party; (e) any liability, so far as it is secured; (f) any liability owed to employees or workmen including pension liabilities of the specified service provider except for liabilities designated as performance based incentive under section 51; (g) any transaction covered under section 47; and (h) such other liabilities as may be specified by regulations made by the appropriate regulator in consultation with the Corporation and the Central Government."
Prime Minister Narendra Modi, as well as Finance Minister Arun Jaitley, have tried to allay the fears of depositors by reassuring them that their money is safe in banks. The Prime Minister accused the opposition parties of spreading falsehood and claimed that the bill, in fact, insures the deposit.
The bill too underlines that the bail-in instrument or scheme will not affect "any liability owed by a specified service provider to the depositors to the extent such deposits are covered by deposit insurance."
Both the repeated assurances by the Prime Minister and the Finance Minister as well as the provision of deposit insurance in the bill have, however, failed to dispel fear among depositors. Depositors feel that the draconian provisions of the FRDI bill would bring back the era of 1913-1960 when 1600 banks closed down and depositors lost all their money.
The reason for the depositors' refusal to believe in the government is simple. They say that the only assurance the government have given so far is that their deposits are insured. But the insurance that the government is referring to provides cover only for deposits of up to Rs one lakh per depositor per bank. Anything above Rs one lakh continues to face the risk of forfeiture by a sinking bank. The Deposit Insurance and Credit Guarantee Corporation set up in 1961 provides for insurance of deposits in banks up to Rs one lakh only. The government could have removed the depositor fears by issuing an unambiguous statement that this limit of the insured amount would be enhanced. But the government has not given any such assurance. The bail-in provision in the FRDI bill is, therefore, being read by the common folks as an attempt by the government to refuse bail-outs to banks in the event of them going bankrupt in future. The banks are, instead, being empowered to bail-in by tapping into their internal resources such as deposits.
The Associated Chambers of Commerce and Industry (Assocham), in a statement, asked the government to remove the bail-in clause from the FRDI bill. The industry chamber said that the trust in the banking system runs the risk of being eroded if the clause is not dropped. It said that the move to empower banks with a bail-in provision seems to have been guided by the government's decision not to bail out a bank in trouble.
Assocham said that "the depositors are covered only up to Rs one lakh, which is a measly sum for millions of middle-class families which have kept their life savings in bank deposits."
Assocham Secretary General DS Rawat said that the government should protect the savings of millions of Indians. He said if the government failed to protect bank deposits, "the savings by the households would find its way into unproductive avenues like real estate, gold, jewellery and even in the unorganised and informal financial markets run by unscrupulous people."
He said the middle-class families and especially the pensioners and other old people have no social security and the bank deposits are their only financial security.
With non-performing assets (NPAs) or bad loans mounting for banks and credit growth slowing down, the Union government pitched in with a bail-out package of Rs 2.11 lakh crore for the stateowned banks. But the government is clearly not in a mood to endlessly support sinking banks. Through legislation such as the FRDI bill, the government is giving powers to the banks to tap the hitherto untapped internal resource by freezing and seizing the deposits. But laws such as these would drive away the investors and depositors. And when the deposits slow down, even the government would not be able to stop the banks' downward spiral. The government's remedy, therefore, appears worse than the disease.
For those who believe that no government would ever allow banks to appropriate depositors' money, it is important to point out that it has already happened. And not in some poor, third world country in a distant past, but in a European country - Cyprus and that too in 2013 when banks forfeited people's hardearned savings to cover their losses.
It is also important to note that the global financial crisis which began in 2007 demonstrated that large banks and other financial behemoths which are the financial backbone of a country and which are considered too big to fall may also collapse. The 2008 collapse of Lehman Brothers in the US being a case in point.
The Modi government seems to have picked up the idea of bail-in from countries such as the US, UK, Canada, Germany etc. All these countries have a bail-in law for banks. But along with the bailin law, these countries also have effective deposit insurance.
UK's Financial Services Compensation Scheme, for example, provides protection to deposits up to one million pound sterling. Compare this to our deposit insurance of Rs one lakh that has remained unchanged since 1993. And the worst part is that if you have more than one account in the same bank or more than one deposit in the same bank, the total insurance that you would have for all your accounts and deposits would be Rs one lakh only. So it would be wise to immediately ensure that you spread your deposits to as many banks as you can instead of keeping it all in one bank, besides looking for other avenues to protect your savings.