Sec 52 of proposed FRDI Act

Bail in Lenders and Depositors out?

Lot of heat is generated over the proposed Section 52 of the FRDI Bill.  This section empowers the Resolution authorities to ‘cancel’, ‘modify’ or ‘change’ the form of liability of the institution or cancel the liability altogether.  In respect of Banks, the major liability is in the form of Deposits accepted from the Public, large and small.  Naturally everyone is worried whether the resolution adopted will ‘nullify’ the deposit, restrict/defer the liability to the depositor or will it convert the depositor into a shareholder in a stressed banking institution.  The government, the regulator, media and all persons keen to implement the Financial Reforms in the country join together to reassure that the depositors need not worry and they will be protected.  But when an act is passed giving powers to invoke ‘bail-in’, what is the guarantee that this will never be used? If it is used, what is the recourse available to depositors to challenge the action of the resolution authorities?

Let us look at the following facts

1.1. Major part of the fund needs of the Indian Corporates, MSMEs, Agriculturists, Individuals are supported by the Banking System and more by the PSBs.  In fact, even today, a major portion of the infrastructure funding in India had come from PSBs and a select few Pvt. Sector Banks (It is another story that funding to this sector opened the stress gates in Banks). This situation is totally different in other parts of the world.  Funding of the economy is done through various sources and Banking is only one of such sources depended upon. 

2.  2. Deposits constitutes nearly 90% of the liability of the Banks’ Balance Sheet in India, which is different in other parts of the world, where deposits constitute only 60-65% of the liabilities.

3.  Hence the major part of the liquidity of the Indian Economy itself depends on the continuous availability of the deposits of the Public kept with the Banks.

4.  3. Since 1964, when DICGC was born to protect the deposits of public upto a certain amount, (Now Rs.1 lac), even the small private banks were either merged with Public Sector Banks or with other private sector banks (Bank of Cochin, Bank of Rajasthan, Nedungadi Bank, Bank of Madura, Times Bank to name a few).  And the mergee Bank has turned around in course of time.  Even prior to the decision of the Regulator to merge these banks, there was no instance of ‘a run on the Bank’ by the depositors of the respective merged entities. This means a lot, as that is the faith the public has reposed on the Government and the Regulator RBI.

5.  4.Banking Reforms were introduced since 1991.  The huge level of NPAs confronted the Banks in India already twice.  First was the phase between 1998 to 2004 and the second phase is since 2011 till date.  If one could recall, in 1992 Indian Bank and a few others incurred huge losses.  And in the second phase since 2011 at least 10 Banks are reporting red for the last three years. Inspite of the huge losses shown in the books or NPAs touching 20% in some cases, we have not yet read any reduction in deposits of any of these Banks, leave alone a ‘Run on them’.  In fact, the growth story in deposits continues for all the Banks, the only difference probably is in the percentage of growth. The debate on the health of the Banks is a hot topic among media, the intelligent, the regulator and the government.  The common depositor has stayed away from this, as he has immense confidence in the ‘Sovereign Indian Republic’

6.   5.In 2008, at the height of Global Crisis when there was panic everywhere, Indians quietly lined up in queue and deposited thousands of crores in Banks.  SBI was receiving Rs.1000 crores deposits every day at that time.  When there were huge queues before ICICI Bank for withdrawals, a single line statement from RBI was enough to assure the depositors.  Confidence was restored in that Bank.

7.  6.Depositor is an unsecured creditor and he gets interest rates between 6 and 7 percent for fixed deposits and 3 to 4 percent for savings deposits.  His average return is less than the yield on government securities which is above 6 percent.  On the other hand, Banks charge on any unsecured lending at rate above 12 percent.  Knowing this aberration and discrimination, the depositor has not stopped remitting money. For a common Indian, safety of money is the main worry and he finds Banks as his trusted guardian.

7.    If the undeclared aim for this section is to move depositors into mutual funds, equity or commercial bonds, it might not happen as the said sectors have not yet displayed their immunity in times of crisisUnder the above circumstances, do we really want the confidence of the public in the Banking System be destroyed?

Assuming that the Act is passed with section 52 intact, the stated aim might not materialsie for the resolution authority. Even when a small stress in the assets of the Bank is witnessed, high value depositors say Rs.10 lacs and above,  will quietly withdraw the money and move it into real estates, gold, etc.  So when the act is invoked, only the small depositors will be affected. With no fresh accretion, Banks which otherwise would have survived the crisis in 2-3 years time, might be forced into liquidation, not heard in India for 50 years now. The entire economy which depends on the savings of Indian Public, in the form of deposits with the Banks,for its funding needs, might suffer much more greatly.

In my opinion, two things needs to be done urgently while bringing in the Bill before Parliament.

A. The Central Government shall give a categorical undertaking that its liability as a major stakeholder continues for all depositors and this “Bail-in” clause will not be applied in respect of PSBs.  In respect of other Pvt. Banks, the regulator and the Government will initiate all steps to protect the interests of the depositors as is being done hitherto.

b.  B. The Insurance Cover for deposits shall be enhanced to Rs.25 lacs, with slab wise and individual bank risk based (depending on rating) premium for all deposits of Rs.1 lac. 

   Regards

   V. Viswanathan    

   1st August 2018