Faced with the gargantuan challenge of resolving the issue of burgeoning Non-Performing Assets (NPAs) of Public Sector Banks (PSBs), the Narendra Modi government is aiming to introduce Cyprus-style ‘bail-in’ clause, which essentially puts the onus of bad lending decisions made by a bank on the depositors.

The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, approved by the Cabinet in June this year, and forwarded to a Joint Parliamentary Committee has a sneaky ‘bail-in’ clause, the purpose of which is to absorb the bank’s losses and to aid its survival.

What this means for the depositors

If the draft bill gets the nod of Parliament, it will empower the Resolution Corporation to cancel a bank’s liability or alter it to another security. When we deposit money in a bank, in a savings or fixed deposit account, it is based on the promise that the bank shall return the money on demand. Essentially, any money you put in a bank is a form of an unsecured loan you give it.

However, with ‘bail-ins’, the banks would be empowered to simply refuse the repayment of the customer’s hard-earned money, or in some cases, issue securities like preference shares, in lieu of the money. These deposits would then be used for the recapitalisation of the ailing bank. It makes you an unwilling investor in a bank when all you asked for is hassle-free banking services.

The only money that would be safe from this sneaky clause in the amount covered by deposit insurance. However, the draft bill also vests enough power in the Resolution Corporation to take a call on the amount insured for each depositor. In such a scenario, it is entirely possible that the amounts insured will vary from bank to bank, and from customer to customer (in the same bank).

Banking set to change

Banking, as we know it, is set to change if the government has its way. Depositing money in a bank would no longer be considered safe, given the fact that access to it in an emergency will not be guaranteed. Fundamentally, the relationship between banks and customers will undergo a sea change. Customers will have to exercise the same kind of due diligence before depositing money, as is natural when investing in mutual funds or when buying the shares of a company. The customer will have to deal with the additional burden of constantly monitoring the financial health of his bank, and perennially switching bank accounts. In a country where large sections of people are still unbanked and are being newly introduced to the banking system, such kind of financial intelligence can hardly be expected.

While corporate honchos will get away, it is the customer who will be coerced to part with his savings. The ill-meaning clause does not consider that PSBs account for 63% of the market share, while private banks control just 18%. Most of these public banks are in poor financial health, and thereby it would mean that the deposits in these banks are under threat. If this bill gets the nod, it is the poor, and the weakest sections of society that will be hit the hardest.

Like Demonetisation, this is yet another anti-people move by the Narendra Modi government.