Priding themselves for being 'cash-less' post demonetization last year, some Indians may come face to face with a horrific post-apocalyptic future where they could be deposit-less too. Yes, this could be a reality unless the government of the day removes the unholy 'bail-in' clause that theoretically allows beleaguered banks and financial institutions to legally usurp depositors' money in a desperate bid to stop going bust. What will happen if one day you find your hard-earned money just disappear forever? We live in times when bank deposits are the gold standard of safety, but that sheen can quickly fade away.



Recently, the Indian government gave the banking system a $32 billion shot in the arm. The massive recapitalization scheme was required because some state-run banks are loaded with mountains of dodgy loans. Estimates show 10-12% of all loans made in India have turned bad, or as they say in banking parlance, have become 'non-performing'. What will happen if another crisis hits the banking system? The answer to this question depends on The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017. If this bill goes through in its current form, some of you as depositors may end up financing the next multi-billion shot in the arm the Indian banks would require the next time, and the next time, and the next time.



The FRDI Bill was cleared by the Union Cabinet cleared in June 2017. Last heard, the bill was under the consideration of a parliamentary committee. While the bill when it becomes a law will lead to the birth of a Resolution Corporation which will exercise control over banks, insurance companies, and other financial institutions, it contains the hair-raising 'bail-in' clause that has serious consequences for even common depositors. You may have heard about 'bail-out', where an individual, entity or the government gives money to a failing business to prevent it from going kaput. A 'bail-in' is exactly the opposite, which involves rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings. In banking terms, depositors are considered unsecured creditors since no depositor seeks security from banks to keep the money.



While a bail-out involves money of external parties, a bail-in signifies funds taken from internal stakeholders. In the Indian context, a bail-in could see depositors losing the control of their deposits in case a bank’s financial situation deteriorates so much. Though it's hard for people to believe any government anywhere would ever let that happen, it's happened before. In 2013, bank depositors in the small European country of Cyprus lost millions as their savings were seized to cover bank losses. In the last 2-3 years, different countries have implemented legislation that would allow them to first freeze bank assets during the next crisis. These moves are all about stopping people from moving their capital into actual physical cash. But a 'bail-in' takes this to a different level altogether.



Trade unions, banking experts, and political parties have opposed this clause. Against this backdrop, Finance Minister Arun Jaitley has sought to allay fears about the 'bail-in' clause in the FRDI Bill, but the bigger question is why was such a clause inserted in the first place. Are depositors to blame for the non-performing loan mess Indian banks find themselves mired in with amazing regularity? The unequivocal answer is no. Without depositors, banks could never have lent in the first place. The mess is because of the bank and the borrowers. Depositors are sacred, and so is their trust.



This provision in the FRDI Bill is with an aim on resolving bankruptcy scenarios among too-big-to-fail financial entities. Just because something is too big to fail, doesn't mean it can take away the rights of everybody else. As it is, all deposits of all depositors are not 100% insured. The sordid truth is all our deposits in banks are not 100% safe, even though instances of commercial banks going belly-up are rare. In India, less than a third of bank deposits in value terms are insured by the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). If a bank goes bust, the DICGC will pay back the insured amount to the depositor but that is restricted to just Rs 1 lakh per depositor per bank. The FRDI Bill is reportedly silent on the extent of deposits to be guaranteed and that remains a key source of concern



Though many would like to say that the 'bail-in' clause is just meant as a last measure or emergency capital for banks, the surreptitious sneaking in of a measure to execute hair-cuts on depositors' money. The bail-in clause in its current form gives the power to convert any securities from one class to another, including the creation of a new security in the modification of an existing security. This may mean that deposits may be converted to shares. This means your deposits can be converted into equity in order to recapitalize and bail out banks that are facing bankruptcy. Even depositors, who had to undertake hardships to lay their hands on their own money during the 2016 bank-note demonetization, will find it is incredible that the government wants to appropriate their hard-earned savings to bail out useless banks.



This 'robbing Peter to pay Paul' is wrong on so many levels. Any such sly move hits and takes away the indirect safety and guarantee of deposits that we Indians come to associate with banks. No government in its right mind should dare to do this unless they actually want depositors to move away from bank FDs!



(The writer is a journalist covering personal finance)

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