- GS Prelims, GS Mains paper III
- Economy, Financial Resolution and Deposit Insurance Bill
- There is furious public debate around the Financial Resolution and Deposit Insurance (FRDI) Billtabled in August and now under the scrutiny of a Joint Parliamentary Committee (JPC).
- The Bill seeks to lay down a clear resolution mechanism for banks and financial firms in the case of default.
Clause 52 of the Bill- Powers to the Resolution Corporation:
- This clause is sending ripples of unease among savers.
- The Bill seeks to repeal the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act of 1961, handing over its role to the new Resolution Corporation.
- Clause 52 of the Bill empowers the Resolution Corporation overseeing bank defaults to use a bail-in provision against creditors to absorb losses.
- In invoking this bail-in, the Corporation can cancel any of the bank’s liabilities or change their terms.
- Speculation is rife that the Centre is planning to take the route taken by regimes such as Cyprus, where public deposits were cancelled to fund bank haircuts on bad loans.
Bail-in versus Bail-out:
- A bail-in is rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings.
- It is the opposite of a bail-out, which involves the rescue of a financial institution by external parties, typically governments using taxpayer’s money.
- Typically, bail-outs have been far more common than bail-ins, but in recent years after massive bail-outs some governments now require the investors and depositors in the bank to take a loss before taxpayers.
What are the points that must be taken care of by the JPC:
- Clause 52 clearly exempts deposits covered by deposit insurance from the purview of bail-ins.
- The Bill requires banks to first incorporate a bail-in clause into their creditor contracts.
- Even today, depositors in Indian banks are protected only to the extent of the insurance cover provided by the DICGC which stands at ₹1 lakh per bank. Depositors who hold in excess of this can even today be subjected to ‘bail-in’ if a bank fails.
- Most Indian savers are unaware of this Rule (Insurance upto only Rs 1 Lakh) and put faith in banks presuming an implicit sovereign guarantee.
- But given the precarious state of some PSB balance sheets, and the fact that crores of Indians have just embraced banking through the Jan Dhan Yojana, this is a particularly bad time for lawmakers to test this faith.
- The Centre should redraft the ambiguously worded portions of the Bill to clarify if deposits will be subject to bail-ins, and if so, with what basic protections.
- The reiteration of the sovereign guarantee to PSBs is reassuring, but informed depositors may like more details about how the insurance mechanism will change under the FRDI and the extent of discretionary powers to the Resolution Corporation.
- The time is also ripe to sharply increase the measly deposit insurance cover of ₹1 lakh per depositor set over two decades ago. The JPC must incorporate these aspects into its ongoing review of the FRDI Bill.