Bank Fixed De­posits

Should you worry about the pro­posed bail-in op­tion?

Consumer Voice - - Contents -

Var­i­ous sur­veys point out that the ma­jor­ity of house­holds pre­fer to park their money in bank de­posits, with less than 10 per cent opt­ing for in­vest­ing in mu­tual funds or stocks. Why? Be­cause con­sumers be­lieve that in­vest­ing in bank fixed de­posits is one of the safest and old­est (hence tried and tested) ways to park their sur­plus funds and thereby earn reg­u­lar in­ter­est in­come. In fact, now is per­haps a good time to in­vest in bank fixed de­posits, as the rates are go­ing up­wards. With Re­serve Bank of In­dia (RBI) need­ing to re­duce liq­uid­ity and money sup­ply in the bank­ing/ mon­e­tary sys­tem, the last few months of 2018 have seen banks re­vis­ing the de­posit in­ter­est rates up­wards to tap into the ex­cess liq­uid­ity. But what if the fi­nan­cial sit­u­a­tion of a bank de­te­ri­o­rates so much that it be­comes un­able to re­pay the de­posits it holds? What guar­an­tee does the cus­tomer have in such a sit­u­a­tion?

All banks that are mem­bers of De­posit In­sur­ance & Credit Guar­an­tee Cor­po­ra­tion (DICGC) en­joy a de­gree of pro­tec­tion – there is in­sur­ance cov­er­age against the bank wind­ing up and/or liq­ui­da­tion of the bank, for which the bank needs to pay a nom­i­nal in­sur­ance premium at reg­u­lar in­ter­vals. The bank de­pos­i­tors thereby en­joy DICGC cover up to Rs 100,000 per de­posit ac­count in each bank, in the event of an un­for­tu­nate event.

Now, with the pro­posed in­tro­duc­tion of Fi­nan­cial Res­o­lu­tion & De­posit In­sur­ance (FRDI) Bill (pend­ing for pas­sage in Lok Sabha and Ra­jya Sabha be­fore be­com­ing an Act of Par­lia­ment), there may soon

be a re­place­ment for the ex­ist­ing DICGC. When in­cor­po­rated, the Act will pro­vide de­posit in­sur­ance up to a cer­tain limit (un­con­firmed sources in­di­cate a higher de­posit limit of up to Rs 300,000) in the event of bank fail­ure.

The new Bill is be­ing in­cor­po­rated to deal with is­sues that can arise when com­pa­nies op­er­at­ing in the fi­nan­cial sec­tor (such as banks, in­sur­ance com­pa­nies and stock ex­changes) go bust. It may be noted that the In­sol­vency and Bank­ruptcy Code (IBC) is al­ready in place to deal with sit­u­a­tions where com­pa­nies (in­cor­po­rated un­der The Com­pa­nies Act) go bank­rupt or in­sol­vent.

Con­sumers’ Con­cerns

The FRDI Bill has a pro­vi­sion that has caused some grief among bank de­pos­i­tors. Ap­par­ently it al­lows merger/ac­qui­si­tion, bail-in, trans­fer of a sick en­tity’s as­sets and li­a­bil­i­ties to a third party (so as to form a bridge com­pany to con­trol these as­sets and li­a­bil­i­ties), and liq­ui­da­tion. In other words, it al­lows fail­ing banks to use de­pos­i­tors’ money to cut losses.

The bill has sug­gested that the use of the ‘bail in’ pro­vi­sion may re­sult in can­cel­la­tion of a li­a­bil­ity, which could ex­tend to bank de­posits or could lead to mod­i­fi­ca­tion of the terms or chang­ing the form of the as­set class. This pro­vi­sion would be last in the line for pay­ments in case of liq­ui­da­tion.

To as­suage the anx­i­ety of de­pos­i­tors, the gov­ern­ment has said that pub­lic sec­tor banks are well out of the radar as such emer­gen­cies are not likely to arise in them, the rea­son be­ing that the gov­ern­ment takes care of the cap­i­tal needs of these banks. On the other hand, this tool will serve as the last re­sort in pri­vate sec­tor banks only when a merger/ac­qui­si­tion is not vi­able.

We chose 12 fixed de­posits of­fered by banks based on con­sumer feed­back, pop­u­lar­ity and avail­abil­ity of full in­for­ma­tion in the pub­lic do­main (in­clud­ing of­fi­cial web­sites). The pa­ram­e­ters on which we have com­pared them in­clude min­i­mum de­posit, min­i­mum and max­i­mum RoI, max­i­mum RoI within min­i­mum pe­riod, op­tion for part with­drawal of de­posit, max­i­mum penalty for pre­ma­ture with­drawal, ad­di­tional max­i­mum RoI for se­nior cit­i­zens, loan fa­cil­ity and auto re­newal. We gave high weigh­tage (10 points) to con­sumer feed­back, which also helped in de­ter­min­ing the most im­por­tant and ben­e­fi­cial vari­ables. These vari­ables have a di­rect bear­ing on the prod­uct struc­ture.

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