BANK­ING ON DE­POSITS

India Today - - INSIDE - By Sh­weta Punj

The Fi­nan­cial Res­o­lu­tion and De­posit In­sur­ance Bill would pos­si­bly have gone through Par­lia­ment with­out a mur­mur if it weren’t for the con­tentious ‘bail-in’ clause that has stoked heated de­bate on whether this con­sti­tutes abuse of de­pos­i­tors’ rights. It might even prod the gov­ern­ment to raise the de­posit in­sur­ance from the cur­rent Rs 1 lakh. In ef­fect, the clause al­lows dis­tressed banks to be ‘bailed in’ with de­pos­i­tors’ funds rather than be­ing bailed out by the gov­ern­ment with tax­pay­ers’ money.

In In­dia, bank de­posits upto Rs 1 lakh are in­sured by the De­posit In­sur­ance and Credit Guar­an­tee Cor­po­ra­tion (DICGC), a sub­sidiary of the Re­serve Bank of In­dia. The FRDI bill en­ti­tles dis­tressed banks, star­ing at the prospect of po­ten­tial bank­ruptcy, to re­struc­ture their de­posits—con­vert them into eq­uity or time de­posits or any other in­stru­ment banks in such dire straits may deem fit.

The bill, sim­i­lar to the In­sol­vency and Bank­ruptcy Code, 2016, is fo­cused on com­pa­nies in the fi­nan­cial sec­tor. It seeks to pro­vide a res­o­lu­tion frame­work to deal with bank­rupt­cies in banks, in­sur­ance com­pa­nies and other com­pa­nies in the fi­nan­cial ser­vices sec­tor. It en­vis­ages a ‘Res­o­lu­tion Cor­po­ra­tion’ and a ‘Cor­po­ra­tion In­sur­ance Fund’ for de­posit in­sur­ance, re­plac­ing the DICGC, set up in the early 1960s af­ter two banks col­lapsed.

In In­dia, norms for cap­i­tal ad­e­quacy and liq­uid­ity for banks have also worked as early warn­ing signs for the RBI to step in and avert crises. In­stances of com­mer­cial banks go­ing

The gov­ern­ment will know that a bill em­pow­er­ing cred­i­tors’ rights will bol­ster its image with po­ten­tial in­vestors

bust are few, and at a sign of se­ri­ous trou­ble, the RBI has gone ahead and merged a weak bank with a strong bank. In 2014, when the United Bank of In­dia cri­sis be­gan to un­fold, as its tier-1 cap­i­tal fell be­low the statu­tory re­quire­ment, the RBI curbed fur­ther lend­ing to pro­tect de­pos­i­tors’ in­ter­ests.

How­ever, in re­cent years there has been a sharp de­te­ri­o­ra­tion in the fi­nan­cial health of public sec­tor banks. The RBI’s June Fi­nan­cial Sta­bil­ity Re­port makes sober read­ing: it warns that the gross bad loan ra­tio will rise to 10.2 per cent of the to­tal loan book in March 2018 from 9.6 per cent in March 2017. For public sec­tor banks, this ra­tio could go up to 14.2 per cent by March 2018, up from 11.4 per cent in March 2017.

In his 2016-17 bud­get speech, Union fi­nance min­is­ter Arun Jait­ley spoke of a sys­temic vac­uum with re­gard to bank­ruptcy sit­u­a­tions in fi­nan­cial firms. A com­mit­tee was set up, un­der Ajit Tyagi, ad­di­tional sec­re­tary, De­part­ment of Eco­nomic Af­fairs, to pre­pare a draft FRDI bill, on which the fi­nance min­istry sought com­ments till Oc­to­ber 31, be­fore the Cab­i­net ap­proved it for in­tro­duc­tion in Par­lia­ment.

Among other is­sues, the bill has raised ques­tions about how the pro­posed Res­o­lu­tion Cor­po­ra­tion, a par­al­lel body to mon­i­tor the health of banks, may im­pinge on the RBI’s man­date to be that watch­dog. There is no men­tion of a re­vised de­posit in­sur­ance thresh­old, and the cur­rent Rs 1 lakh limit is abysmally low, es­pe­cially in a sce­nario where a ‘bail-in’ has been le­git­imised.

Crit­ics of the bill say the gov­ern­ment is try­ing to do too much too soon vis-à-vis dis­tressed banks. “Try­ing to re­solve the NPA prob­lem in six months is tak­ing on too much af­ter years of in­ac­tion,” says a Mum­bai-based econ­o­mist pre­fer­ring anonymity. But the gov­ern­ment prob­a­bly has an eye on fur­ther im­prov­ing In­dia’s ‘ease of do­ing busi­ness’ rank­ings, and will know that a bill em­pow­er­ing cred­i­tors’ rights will bol­ster its image with po­ten­tial in­vestors. It will also prod de­pos­i­tors to con­sider a bank’s risk pro­file be­fore park­ing their de­posits with it.

In the face of stri­dent crit­i­cism, the gov­ern­ment has hinted at a re­view of the bill. Chances are it will be re­ferred to a se­lect com­mit­tee, of­fi­cialese for send­ing it into the freezer.

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