In the latest clarification on the Financial Regulation and Deposit Insurance (FRDI) bill, the government has claimed that the new rules will not adversely affect depositors. If you haven’t heard of the FRDI bill, it was first tabled in parliament in August 2017 and aims to pass a resolution allowing bail-ins for banks.
A bail-in is exactly what it sounds like; the opposite of a bail-out. Instead of the government helping out financial institutions, the FRDI bill will allow banks to use depositor money to pay off their debts.
Won’t that adversely affect depositors?
Basically, the government has placed a lot of stipulations on using a bail-in. It can only be used as a last resort, will be subject to the scrutiny of both the government and parliament, and will not be used for public sector banks.
Considering that public sector banks hold the majority of India’s bad loans – estimated to be around $147 billion in November – this will come as a relief to most depositors.
Another point that the government stressed in their latest clarification is that depositors will not lose more than they would under the current laws. Under current laws, when a bank is liquidated, only Rs 1 lakh per account is insured if a bank goes bankrupt. Under the new FDRI bill, that same amount of insurance has retained.
Should I be scared?
The resolution to allow bail-ins should not be a worry to most depositors. Unlike other recent financial policies like demonetisation and GST reform, the FRDI bill will not affect the day-to-day business of average people. A bail-in is a last case scenario. Even at the height of the global depression 2008-09, there was no bail-in. In fact, no Indian bank has been liquidated for almost 50 years.
If there is something to be scared about, it is the Indian financial system’s tendency to grant loans based on nepotism and reputation rather than the borrower’s ability to pay back. Private banks’ inability to properly identify non-performing assets or bad loans is yet another issue. For example, the RBI determined in October that Yes Bank had Rs. 6,255.20 crore more non-performing assets than they had declared in March!
The FRDI bill is not scary because it opens up depositors to banks’ liability – it is scary because it treats the symptoms rather than the cause of India’s bad loans problem.