In Delhi’s power corridors, discussions on the possible outcome of elections in Gujarat and Himachal Pradesh could soon be drowned with one revolving around people’s biggest asset—cash deposits in banks.
There are questions—whether the government could soon take the deposits away without notice and offer peanuts in return? Will it have some severe effects like demonetisation? No answers are forthcoming, only gossip is filling Delhi's already polluted skyline.
They are calling it the BJP-led NDA government’s Chewbacca moment—the much-feared Financial Resolution and Deposit Insurance (FRDI) Bill whose powers are both vast and wide and characters unknown, hence worrying for the masses. The original Chewbacca moment happened over four decades ago when the half man-half ape Wookiee warrior of Star Wars series appeared on the screens and took people by both fear and surprise, everyone worried about its intentions.
Finance Minister Arun Jaitley, aware of the concerns of depositors over provisions of FRDI Bill, addressed a presser on Monday, December 10, 2017, saying the government will fully protect public deposits in financial institutions. He even hinted at openness to make changes in the proposed FRDI Bill. The NDA government has drawn up a massive Rs 2.11 trillion bank recapitalisation plan to strengthen public sector banks, many of them reeling under stress of non-performing assets (NPA). “But that cash will not come from the people, the government will fully protect the deposits made by customers.”
But fears still persist, wide and large.
Trade unions of all PSU banks, worried about the Bill bringing potential harm to deposits in the form of savings accounts, have decided to strike if the Bill is pushed through by the joint committee of Parliament. Worse, the unions argued that the government did not seek any reactions from stakeholders before introducing the Bill in Lok Sabha this August, 2017. Stakeholders are now meeting up with representatives from the ministry of finance to offer their arguments on the Bill, which proposes to create a framework for overseeing financial institutions such as banks, insurance companies, NBFCs and stock exchanges in case of insolvency.
“Fears in the minds of millions of people must be addressed and the government is doing it,” says seasoned economist Surjit Bhalla, Prime Minister's Economic Advisory Council (PMEAC) member.
He admits that people's fears stem from the “resolution corporation (RC)”, proposed in the draft FRDI Bill which would look after the process and prevent banks from going bankrupt. It would do this by “writing down of the liabilities”, a phrase some have interpreted as a “bail in”. The draft Bill empowers RC to cancel the liability of a failing bank or convert the nature of the liability. It does not specify the deposit insurance amount. At present, all deposits up to Rs 1 lakh are protected under the Deposit Insurance and Credit Guarantee Corporation Act (DICGC) that is sought to be repealed by this bill.
The fear is over the RC and its activities and powers—that is the Damocles Sword hanging on peoples’ heads.
The RC will have representatives from all financial sector regulators, finance ministry and some independent directors. And then it will classify financial firms into five categories based on their risk of failure—'low', 'moderate', 'material', 'imminent' and 'critical'. If the firm gets classified as 'critical', the RC will use any one or more of five routes to resolve the crisis.
“So what happens to my bank deposits and can these be used in the bail-in clause?” asks Congress leader Adhir Chowdhury.
The finance ministry is not offering an immediate answer because India has always been faced with a slow-motion bank crisis—state-owned banks saddled with a bad-loan ratio that’s almost twice as bad as their private counterparts. Currently, NPAs make up more than 10 per cent of banks’ advances. But will the recapitalisation leave Indian banks stronger and more sustainable? The government had put Rs 20,000 crore into the banks in the early 1990s. In the years following the financial crisis, it injected another Rs 58,600 crore.
Chowdhury says the 'bail in' provision has been interpreted to mean that depositors, who rank low in the hierarchy of claimants, could see part of their deposits being converted to keep the financial firm solvent. “We need some clarity here from the government,” says the Congress leader.
In 2014, before the NDA returned to power, the Financial Stability and Development Council (FSDC) mandated a working group headed by finance secretary Arvind Mayaram and RBI deputy governor Anand Sinha, which recommended the setting up of a resolution regime for the failure of weak financial institutions. The group said losses would be absorbed by shareholders and unsecured creditors, and the action would respect the hierarchy of claims.
“But are Indians ready for this behavioural change that nudges investors to be mindful of risks and to accept both risks and rewards?” asks Yogendra Yadav, senior fellow at the Centre for the Study of Developing Societies. He says an online petition against the Bill—“Do not use innocent depositors’ money to bail in mismanaged banks #NoBailIn”—has attracted almost 390,000 signatures.
Yadav says the country’s financial sector is bank-dominated, and bank deposits make up the dominant share of financial savings. Public sector banks comprise 63 per cent of the Indian banking system. “The government want to push people on the same path as in many other parts of the world — to ultimately lower risks and the potential burden on taxpayers, although there is no explicit mention of this in the proposed law. There are concerns that the Bill may not clearly lay down the quantum of protection for deposits, or classify deposits separately,” he adds.
In short, the government must re-ensure its implicit sovereign guarantee that protects deposits no matter how badly government-owned banks perform. So that people can keep their savings in term deposits with a United Bank of India (UBI) and United Commercial Bank when their net worth was badly eroded, without worrying about the bank going bust or the fact that only Rs1 lakh per depositor was guaranteed by deposit insurance.
That must happen, else there will be no end to the Chewbacca conversations.
