Shortly after demonetisation, serpentine queues outside banks and ATMs were a reality. Is the FRDI Bill, another shocker in the making?
The Indian public had only just come to terms with the twin blows of the hugely disruptive and detrimental exercise of demonetisation and the well-intentioned but haphazardly implemented GST. We are now faced with the prospect of a new financial ‘reform’ – the proposed FRDI Bill that could be yet another headache for the common man.
The government proposes to put into place The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill). The bill was introduced to the Lok Sabha in the month of August this year. A report on the bill is expected to be presented before the parliament by the Joint Committee of Parliament during the winter session.
According to the Finance Ministry, this bill is meant to protect the customers who have dealings with financial institutions; when those financial institutions are in financial distress. The bill is also meant to place controls on the way financial institutions and service providers use public funds for the benefit of distressed debtors. The bill seems to reduce the cost involved and time taken for settling such issues. Under the aegis of this bill, setting up of a resolution corporation is also envisaged.
Sounds good. So why is the FRDI Bill attracting so much criticism? It is admirable that the bill seeks to prevent financial institutions from going bankrupt. The problem lies in the bail-in clause that seems to suggest that the financial institutions can use public money – which retail depositors such as you and I have entrusted them with – to boost their sinking fortunes. Further, the proposed Resolution Corporation that will be set up to rescue financial service providers, will also be permitted to use the money of depositors in the event of the institution going bankrupt.
A bail-out lets financial institutions save themselves instead of saving their bankrupt customers. However, the bail-in clause will permit banks that are in the financial doldrums to use the money of depositors to restructure their liabilities. According to Samir Ghosh, General Secretary, All India Reserve Bank of India Employees Association, this means that banks can take the money depositors have deposited with them and issue shares or bonds that will essentially lock in that money; preventing depositors from accessing their own money. Right now the government is denying that depositors’ funds are in any danger. However, how public funds would be safeguarded is not clear yet. Right now, when a staggering number of loans of willful defaulters have either been written off or declared as nonperforming assets, this claim seems dubious in the extreme.
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