FinMin al­lays de­pos­i­tors’ fears on bank ‘bail-in’ pro­vi­sion

FRDI Bill pro­tects, and even ex­pands, safe­guards for con­sumers, it claims

The Hindu Business Line - - FRONT PAGE -

Re­spond­ing to bank de­pos­i­tors’ fears for the safety of their money, the Fi­nance Min­istry on Thurs­day as­serted that the pro­posed res­o­lu­tion frame­work for fi­nan­cial firms, await­ing Par­lia­ment nod, does not take away the “present pro­tec­tions” avail­able to de­pos­i­tors — and, in fact, pro­vides “ad­di­tional pro­tec­tions”.

“The Fi­nan­cial Res­o­lu­tion and De­posit In­sur­ance Bill 2017 (FRDI Bill) is far more de­pos­i­tor­friendly than many other ju­ris­dic­tions, which pro­vide for statu­tory bail-in, where con­sent of cred­i­tors/de­pos­i­tors is not re­quired for bail-in,” an of­fi­cial state­ment said.

A bail-in is a way to res­cue an ail­ing bank or a fi­nan­cial in­sti­tu­tion by mak­ing its cred­i­tors and de­pos­i­tors take a loss on their hold­ings.

This state­ment comes in the back­drop of fears that the pro­vi­sions in the Bill could get ex­tended to bank de­posits. Al­though the Min­istry does not see any ad­verse im­pact on de­pos­i­tors’ in­ter­est, sev­eral bank­ing in­dus­try ex­perts feel the pro­vi­sions could cre­ate a moral haz­ard for banks.

The Min­istry rea­sons that the Bill will strengthen the sys­tem by adding a com­pre­hen­sive res­o­lu­tion regime that will help en­sure that, in the rare event of failure of a fi­nan­cial ser­vice provider, there is a sys­tem of quick, or­derly and ef­fi­cient res­o­lu­tion in favour of de­pos­i­tors.

The Bill was in­tro­duced in the Lok Sabha on Au­gust 10, and is cur­rently be­fore a Joint Com­mit­tee of Par­lia­ment. The panel’s re­port would be con­sid­ered by the Cabi­net be­fore mov­ing amendments, if any, in Par­lia­ment.

The Min­istry fur­ther said that the Bill does not pro­pose in any way to limit the pow­ers of the gov­ern­ment to ex­tend fi­nanc­ing and res­o­lu­tion sup­port to banks, in­clud­ing pub­lic sec­tor banks. It re­it­er­ated that the gov­ern­ment’s im­plicit guar­an­tee for PSBs re­mains un­af­fected.

Unions wor­ried

Bank unions had ex­pressed an­guish over certain pro­vi­sions in the Bill, es­pe­cially those re­lated to “bail-in”. The Bill had sug­gested that the use of the “bail-in” pro­vi­sion may re­sult in the can­cel­la­tion of a li­a­bil­ity, which could ex­tend to bank de­posits, bank­ing in­dus­try sources said. They termed this as the source of anx­i­ety for de­pos­i­tors.

The Bill has pro­posed the set­ting up of a Res­o­lu­tion Cor­po­ra­tion to mon­i­tor fi­nan­cial firms, an­tic­i­pate the risk of their failure, take cor­rec­tive ac­tion and work out a res­o­lu­tion plan. In the case of a bank failure, this pro­posed cor­po­ra­tion will pro­vide de­posit in­sur­ance up to a limit, which has not been spec­i­fied. Cur­rently, bank de­posits up to ₹1 lakh are in­sured.

Other op­tions too

The Bill not only pro­vides for ‘bail-in’, but also other op­tions to bring res­o­lu­tion to the fi­nan­cial firms on the brink of failure. These in­clude merg­ers, trans­fer of as­sets and li­a­bil­i­ties to an­other en­tity, a bridge fi­nan­cial en­tity or liq­ui­da­tion via the Na­tional Com­pany Law Tri­bunal.

Bail-in effect

RV Verma, former Na­tional Hous­ing Bank Chair­man, told Busi­nessLine that the bail-in pro­vi­sion would com­pro­mise de­pos­i­tors’ in­ter­ests, af­fect­ing their con­fi­dence in the bank­ing sys­tem.

“In ex­treme sit­u­a­tions where the gov­ern­ment has to adopt a bail-in, it may com­pro­mise de­pos­i­tors’ in­ter­ests; the de­pos­i­tors’ money will likely be also used for a res­o­lu­tion,” he said, adding that in such cases, a more bal­anced view — a mix of a bail-in or a bailout — may be adopted keep­ing in view the de­pos­i­tors’ in­ter­ests.

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