FRDI Bill: Govt scrapping it is good news for depositors; but India needs stronger laws to handle banks that go broke

The Narendra Modi-government’s smart reversal on the controversial Financial Resolution and Deposit Insurance (FRDI) bill is a bit surprising; the government has been defending the contentious provisions in the Bill for long saying it won’t hurt the interests of common depositors. Prime Minister Narendra Modi too defended the Bill. This is what the PM said in December last year: “The government is working towards protecting the interest and rights of depositors but rumours being spread are totally the opposite." If that was the case, it should have fought for the Bill and proved that the criticism against the proposed legislation is highly misplaced. In the end, however, the government chose to bow to the pressure from the public and its political rivals. Why? The answer is simple, it doesn’t want to give another potential weapon to the Congress party-led Opposition in the 2019 battleground to paint the government as anti-people. What was wrong with FRDI Bill in the first place? The Bill contained certain provisions that let depositors money to be used to bail out failing financial institutions. One of the existing elements of the Bill, called ‘bail-in’ clause ensured this. Secondly, the FRDI Bill didn’t commit a specific deposit insurance amount to protect the depositor if the bank went bust. 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. There was no clarity on what will happen to this protection once the Bill was introduced. The government should have given some assurance on the guarantee on the money retail depositors park in banks and shouldn’t have ventured into moves that would break depositors trust further. [caption id=“attachment_4499571” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] This created confusion at a time when there is a long-pending demand 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. Anything that concerns bank deposits, be it interest rates or safety of deposits is highly sensitive since bank deposits continue to be the most trusted savings avenue for a majority of Indians who are not comfortable with putting their money in riskier financial instruments such as equities and mutual funds. According to a 2017 Sebi survey, 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. In this context, the Narendra Modi government’s U-turn on FRDI Bill, though offers some merit to the criticism, comes as a relief to depositors at a time when the trust in the banking system is already on shaky grounds with recurring scams and a significant jump in NPAs (non-performing assets) in recent years. The bail-in clause was a misfit in the FRDI Bill. Having said that, the government could have retained the Bill, tweaking the controversial provisions, but retaining the main purpose of the legislation. This is to ensure a proper resolution framework for financial institutions that go bankrupt. India does not have a strong legal framework to deal with financial institutions that go broke and safeguard the interest of retail depositors. The Rs one lakh deposit insurance is too low and was set a long time ago when this figure was deemed large enough to cover a majority of deposits. That isn’t the case now. At some point, sooner than later, the government will have to address this issue.