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FRDI Bill and the safety of bank deposits

A background note on the bill talks about the limitation of the existing frame work where it states that there is a lack of competitive neutrality'.

The Financial Resolution and Deposit Insurance (FRDI) Bill-2017 is under the consideration of the joint parliamentary committee. The Bill proposes to create a separate financial resolution corporation to ensure speedy and efficient resolution of issues related to financial firms in distress. The bill repeals the Deposit Insurance and Credit Guarantee Corporation Act, 1961, and subsumes its functions into the corporation. The DICGC gives insurance cover for deposits up to Rs 1 lakh but FRDI bill is silent on this. Moreover, the bill talks about “the powers to write down and convert liabilities (bail-in) which should be exercisable without creditor consent”. This provision has created confusion and concern in the minds of depositors especially in the background of UTI Mutual Fund advertisement on November 23 casting doubt on the safety of bank deposits and the attraction of mutual funds.

A background note on the bill talks about the limitation of the existing frame work where it states that there is a ‘lack of competitive neutrality’. “For public sector financial firms, an implicit or explicit guarantee by the government creates a perception of safety in the minds of consumers and an expectation that they will be insulated from the failure of such firms,” the note says. “This has detrimental consequences for competition in the financial system. For instance, in times of crisis, there is a flight of funds towards public sector banks and away from private banks, which is a competitive advantage arising solely out of ownership”.

The ‘bail-in’ power given to resolution corporation is with clear intention to exclude ‘bail-out’ packages for rescuing a failing firm using the tax payer money. Instead, the distressed firm has to use its own deposits and other non-core assets. At present the bank deposits amount to Rs 110 lakh crore. About 80 per cent of these deposits belong to household savings. It may be recalled that a depositor would lose no penny in India in the event of bank failures in the pre- and post-nationalisation periods due to the insurance cover guaranteed under DICGC. Moreover, many failed private banks were merged with nationalised banks which took care of the interests of the entire depositors.

Now a planned malicious campaign is unleashed about the mounting NPAs of PSBs. Even the parliamentary committee on NPAs has acknowledged the fact that the reasons for NPA lie more with the policies of the government than the inefficiency of the banking system. About 25 per cent of NPAs belong to 12 corporate defaulters and almost 88 per cent of NPAs relate to loans above Rs 5 crores. Such Big loans are sanctioned at banks’ board level where representatives from RBI and finance ministry are involved. Instead of enacting stringent laws to declare willful defaulters as criminals and treat them accordingly, or amending laws to confiscate the properties of the promoters of the defaulting firm, the government is moving ahead with invoking the Insolvency and Bankruptcy Code with an aim to cleanse the balance sheets and make the banks capable of further extending huge credits.

The fact is that the low credit off take is not because of mounting NPAs but because of lack of demand in the economy. According to economists, capacity utilisation in the productive sector in India is around 64 per cent and here will be new investment only when this threshold crosses 80 per cent. Unfortunately, the government does not recognise this and instead puts pressure on the monitory policy committee of the RBI to cut repo rate so that the credit off take will increase automatically. But the fact remains that credit off take has not improved even after a reduction in interest rate by about 1.5 per cent. Thus, a wrong diagnosis has led to wrong treatment and this may lead to further failure of firms. This apprehension looms large in the minds of the public and hence it is the duty of the government to clarify the roadmap in the banking sector unambiguously. The haste at which the FRDI bill is pushed through at a juncture when the banking sector is struggling to come out of NPAs and to meet capital adequacy as per BASEL 3 norms is confusing.

On the one side, the government declares a recapitalisation project,and on the other, it goes ahead with an alternative mechanism to facilitate hastle-free mergers and consolidation of PSBs and further dilution of government ownership. It is for the government to act and show that their intention is to strengthen the PSBs and not to handover it to foreign finance capital. As evidenced during the period of 2008 global meltdown, the Indian economy was saved from crisis only because of the public sector character of the Indian banking system. This should be an eye opener and a lesson to learn from the pages of economic history to the present government at the centre. Let the government come out with confidence building measures among the banking clientele especially the millions of depositors.

(The writer is president, Bank Employees Federation of India)

( Source : Deccan Chronicle. )
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