FRDI Bill: Don't break common man’s trust in banks; Narendra Modi govt should change ‘bail-in’ clause

There is hue and cry over certain provisions of the Financial Resolution and Deposit Insurance (FRDI) bill currently pending before Parliament. The reasons for this public outcry aren’t hard to understand. If this Bill becomes law in the existing format, depositors’ money will be used to bail out failing financial institutions. One of the existing elements of the Bill, called ‘bail-in’ clause ensures this. Another major flaw in the FRRDI Bill is that it doesn’t commit a specific deposit insurance amount to protect the depositor if the bank goes broke. Right now, under the RBI (Reserve Bank of India) rules, all deposits up to Rs 1 lakh is protected under the Deposit Insurance and Credit Guarantee Corporation Act. This will go when the FRDI act comes and a resolution corporation will take up the dominant role in handling the liabilities of a failing financial institution. For several years now, there have been demands to increase the Rs 1 lakh amount with stakeholders citing this as too low for someone who might be depositing his entire life’s savings in the bank. The FRDI Bill provisions add to these concerns. Bank deposits continue to be the most trusted savings avenue for majority of Indians who are not comfortable with putting their money in riskier financial instruments, such as equities and mutual funds. According to (read a report here) a recent survey conducted by Sebi, over 95 percent Indian households prefer to park their money in bank deposits, while less than 10 percent opt for investing in mutual funds or stocks. [caption id=“attachment_4191111” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] “Mutual funds came at sixth place (9.7 percent), followed by stocks (8.1 percent), pension schemes, company deposits, debentures, derivatives and commodity futures (1 percent) as investment vehicles for the urban households", the report said citing the survey. The Narendra Modi government has duly acknowledged the concerns of the common savers. Union finance minister Arun Jaitley has hinted that the Bill is currently under the examination of a Parliament standing committee and the government is committed to protect the interests of depositors. That’s a good move. If the FRDI Bill (presented in Parliament in August) becomes a law in the current shape, that will offer ammunition to the Opposition to portray it as yet another anti-people move by the Modi-government—something clearly this government can’t afford after the backlash over disastrous demonetisation and poorly executed goods and services tax (GST) rollout. The government understands this fact and hence the rethinking. Economic Affairs Secretary SC Garg, too has spoken to allay the concerns of depositors saying principal guarantee for PSU bank depositors come from the government ownership and there is no reason to worry. But, not too many would agree with this argument unless the Bill itself undergoes a change with respect to the two controversial provisions. The concerns, as explained earlier, are valid. If the ‘bail-in’ clause continues, the failure of a bank or other deposit-taking financial institution that comes under the purview of this law, could wipe off the savings of depositors to save the company itself. Such a scenario is not in the interest of the depositors. The Modi government must change controversial provisions of the FRDI Bill without delay.