Comfort for depositors

The FRDI Bill must specify the amount guaranteed

Finance Minister Arun Jaitley has sought to allay concerns of bank depositors about the safety of their savings by stating that the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, is still in the “drafting stage” and the government will ensure that the rights of depositors are protected. The Bill, which was introduced in the Lok Sabha in August this year and is before a parliamentary standing committee, was earlier expected to be tabled in the winter session of Parliament. It seeks to create a new framework for resolving bankruptcy in banks, insurance companies and other financial establishments by setting up a Resolution Corporation, which will determine if there is an imminent risk of a bank failing financially and will trigger what it feels is the right remedy.

While the minister’s reassurance is welcome, depositors will eagerly wait for more clarity on the exact changes the government proposes to bring in the proposed piece of legislation. That is because in its present form, the Bill leaves scope for a lot of ambiguity on how depositors’ savings will be protected in stressed banks and other financial entities. At present, a depositor in a bank can draw partial comfort from the fact that his deposit is insured to the extent of Rs 1 lakh with the Deposit Insurance and Credit Guarantee Corporation. But the FRDI Bill in its current form changes that significantly. The Bill empowers the Resolution Corporation to decide the amount insured for each depositor, creating doubts about the extent of deposits that will be guaranteed. Theoretically, it is also possible that the insured amount will vary for customers across different banks. It could also vary for different categories of customers within the same bank.

Though the FRDI Bill does not propose in any way to limit the scope of powers for the government to extend financing and resolution support to banks and the government’s implicit guarantee for public sector banks remains unaffected, the problem is with the perception. For example, the introduction of a ‘bail-in’ provision has led to fears that the new law will enable banks to be ‘bailed in’ by depositors’ funds through haircuts or write-downs on the value of their savings in banks. Though the Bill has clearly specified the categories that cannot be included in the ‘bail-in’ and the list includes deposits covered by insurance, the non-inclusion of the exact amount guaranteed has added to the confusion. There should also be more clarity on the rationale and the exact circumstances under which the ‘bail-in’ provisions will be triggered so that fears of perceived bankruptcy do not lead to a run on certain banks that are perceived to be weak.

This is necessary as according to a recent survey conducted by the Securities and Exchange Board of India, over 95 per cent of Indian households still prefer to park their money in bank deposits, while less than 10 per cent opt for investing in mutual funds or stocks. Besides, recent financial inclusion initiatives such as the Jan Dhan Yojana have encouraged millions of people to join the formal banking system. Mere assurances by the government that nothing changes after the FRDI Bill and that depositors will continue to be protected like before may not be enough. What is required is clarity in the wording of the relevant clauses in the Bill so that bank depositors indeed feel safe.