‘Bail-in won’t be applied to public sector banks, it will be used as a last resort in the case of private entities’

In yet another clarification about the Financial Regulatory and Deposit Insurance (FRDI) Bill, the government has said depositors will be given preferential treatment in the event of liquidation of a bank, and the controversial bail-in clause will be used only with the prior consent of depositors.

The clarification also said the bail-in clause would not be applied to public sector banks, and it would be a tool of last resort — when a merger or acquisition is not viable — in the case of private sector banks. The government reiterated its implicit guarantee for the solvency of public sector banks.

“The uninsured depositors, that is, beyond ₹1 lakh, of a banking company are treated on a par with unsecured creditors under the present law and paid after preferential dues, including government dues, in the event of its liquidation,” the Ministry of Finance said in a statement. “As per the provisions of the FRDI Bill, the claims of uninsured depositors in the case of liquidation of a bank will be higher than those of the unsecured creditors and government dues.”

Under current laws, deposits with banks are insured up to ₹1 lakh. Under the FRDI law, the Resolution Corporation is empowered to increase this deposit insurance amount.

The FRDI Bill was introduced in Parliament in August 2017 and is under the consideration of a Joint Committee of Parliament.

‘One of the tools’

“Bail-in has been proposed as one of the resolution tools in the event a financial firm is sought to be sustained by resolution,” the statement said. “Certain misgivings have been expressed in the media, especially social media, regarding the depositor protection in the context of the ‘bail-in’ provisions of the FRDI Bill. These misgivings are entirely misplaced.”

According to the government, there is no risk of public sector banks being required to avail themselves of the bail-in clause because the government “always stands ready to take care of the capital needs of the public sector banks.” “Most certainly, it [bail-in] will not be used in case of a public sector bank as such a contingency is not likely to arise,” it said.

“The implicit guarantee for solvency of public sector banks remains unaffected as the government remains committed to adequately capitalise them and improve their financial health.”

The government said bail-in is only one of many resolution tools in the FRDI Bill, with others including mergers and acquisition of the ailing financial institution, and is to be used either singly or in combination with other tools.

The statement said the FRDI Bill includes formal safeguards for the use of the bail-in clause and the protection of depositors’ interests that current legislations do not. “Cancellation of the liability of the depositor beyond insured amount will be possible only with the prior consent of the depositor,” it said.

The bail-in instrument, as designed by the Resolution Corporation, will be subject to Government scrutiny and the oversight of Parliament.

“Bail-in power can be used in a judicious and reasonable manner only by the Resolution Corporation and it will have to ensure that all creditors, including uninsured depositors, get at least such value which they would have received in the event of liquidation of a bank,” it said.

In other words, under the new law, uninsured depositors will recover at least as much of their deposits as they would have if the bank had been liquidated under current laws.

“In case of injudicious and unreasonable exercise of bail-in power by the Resolution Corporation, for example, where the depositors of a bank get less value than in liquidation, such affected depositors will have the right to get compensation from the Resolution Corporation on an order of the National Company Law Tribunal,” the statement said.