By Netra Mittal

In August 2017, a bill passed by the Lok Sabha arrived at the table of the Joint Parliamentary Committee and is now awaiting further approval. Called the Financial Resolution and Deposit Insurance bill, (directly aimed at PSBs) despite being a saviour of financial institutions in crisis, has grabbed the attention of everyone with a bank account for other reasons. Recently, on account of messages forwarded on WhatsApp and other social media platforms, many people feel threatened by the bill’s likely future in our country and what it might mean for them. However, is the worry justified?

What the bill aims at

In one word: Recovery. The primary purpose of the bill is to minimise the risk of failure in financial and non-financial institutions and to help the ones that are performing poorly by recovering their losses. This would mean a single law for all kinds of financial institutions. There would also be a committee, the Resolution Corporation, that would replace the existing one, the DICGC, to oversee the implementation of the bill by monitoring firms, anticipating future risks, taking controlling measures to minimise it, and helping firms resolve in case of failure.

So far, so good, right? However, a number of people are quite concerned about this bill. This worry stems from another constituent of the bill, that is, the power of the RC to cancel liabilities of failing institutions. It does so by using our—the depositors’—money, a process called ‘Bail-in’. This way, the bill basically allows for the banks to use depository money to cover up their losses and it could all happen without us ever being notified about it. This has indeed upset many. To work hard and collect money over a period of time, only to have it taken away? Definitely, unfair.

Moreover, banks aren’t obligated to return all the money taken away by them from us, an unsecured creditor. Worried by what was assumed to be the compensation—one lakh—no matter the amount deposited, people have begun questioning the bill. To add to the distress is the aftermath of demonisation, a cause in the huge rise in bank accounts, and subsequently, bank deposits, as per an RBI paper.

However, the government has provided assurances, claiming that the public has nothing to worry about. Maybe we don’t, after all, the politicians still have elections to win. PM Modi and Financial Minister Arun Jaitley have gone on record to assure the public a guaranteed amount of insurance in such a case of a failing institution. It has also been stated that the compensation of one lakh was under the DICGC, and un-revised since 1993. Relative to conditions now, also bearing in mind inflation, the figure of compensation will definitely be higher.

However, as the depositors will not be allowed to withdraw money or claim a higher compensation from any court (district, regional, or higher) in the presence of the bill, the fairness of the bill is dubious. Like every policy, there are pros, as there are cons.

Analysing the pros and cons

Apart from financial regulation and recovery for financial institutions, there is another possible implication of such a bill, one that has not made it to most headlines. It would allow for healthier investments—both by the banks and by the depositors.

On account of the bill, depositors would be hesitant to deposit in banks—be it public or private (what stops a private bank from using the bill in their favour?)—and would switch to other options like Mutual Funds, and shares or debentures. This would allow for a good financial exercise that would prove as a healthy factor for the economy. On the other hand, banks will be held accountable for every penny, and this would instil some desperately needed sense of responsibility on their part to make good investment decisions. In India, with bribery as a serious problem in the banking sector (with cases where it was done to write off loans worth lakhs), this would be a huge help, due to the pressure by depositors and supervision by the RC.

However, not everyone with a bank account has a sound financial knowledge, as Meera Nagiya, a professor at Delhi University has highlighted, and neither does every working person wish to make extra money, by forfeiting their right to withdraw anytime. However, with digital cash on the rise, it would be an easy transition for middle-income groups, despite being an inconvenient process. As for those with lesser incomes, the minimum compensation guarantee would prove valuable. As the parliament rushes to pass this bill, they remind us that there are still a lot of aspects left to work out and that its status stands very much as Work In Progress. However, it claims that there is a way to help the financial institutions while keeping the depositors in mind—just as the name FRDI suggests.

Featured Image Source: Pixabay

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