Letter to Finance Minister - Request to modify the Financial Resolution and Deposit Insurance Bill 2017

December 12, 2017

The Hon. Finance Minister,

Government of India,

New Delhi.

Sub : Request to modify the Financial Resolution and Deposit Insurance Bill 2017

Respected Sir,

Since the last one month, people have been getting WhatsApp forwards essentially saying that the Modi government is planning to use their bank deposits to rescue all the banks that are in trouble.

As is usually the case with WhatsApp, this is not true.

Where did the idea of fixed deposits being used to rescue troubled banks come from?

The government had introduced The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, in August 2017. This Bill is currently with the Standing Committee.

The Clause 52 of the FRDI Bill uses a term called "bail-in". This clause essentially empowers the Resolution Corporation "in consultation with the appropriate regulator, if it is satisfied that it necessary to bail-in a specified service provider to absorb the losses incurred, or reasonably expected to be incurred, by the specified service provider."

Due to this clause, the FRDI Bill has raised anxieties in the minds of senior citizens and to-be senior citizens who have the bulk of their savings in bank deposits. They apprehend that the Govt. or the regulatory authorities may or can use this bill and Clause no. 52 to convert their hard earned money, lying in fixed deposits to bail in the defaulting banks.

Their concerns are legitimate and the government’s clarifications seem vague. That sows doubt and distrust.

The CONSUMER PROTECTION SERVICE COUNCIL therefore, opposes the FRDI bill in its current form.

The Govt. announcement that the bill shall not harm the interests of the depositors is insufficient. And more reassurance is required. There are good reasons to offer this clarification.

Theconcept behind resolving the failure of a financial institution is to ensure that it does not bring economic activity to a grinding halt, endanger the rest of the financial system and affect the innocent people, the taxpayers. For the most part, the resolution mechanisms in India have satisfied two of these three criteria despite periodic dangers of growing of non-performing assets in the banking system, are very much there.

The underlying principle that the taxpayer shall not asked to bail out failed financial institutions and the costs, if any, should be first borne by insider-stakeholders of that institution, is good, but only in theory.

In practice, in any resolution, when the market value of the liabilities of the failed institution exceed the market value of its assets, the first hit is to the current equity-holders of the institution. In terms of the hierarchy of claims, they are the most junior.

In the case of the Indian banking system, the Govt owns a substantial portion of the banks and hence, is the taxpayer. Hence, in the Indian context, the taxpayer is the first to be bailed in!

In other words, the principle of the FRDI bill, that the resolution mechanism shall protect the taxpayer is a non-starter. Therefore, before bailing in depositors, the government must climb down from its occupation of controlling the banking system.

The second principle is that those who stood to gain from the banks’ profits and operations should be prepared to lose from its failures. That is why equity-holders are first in the list of those to be bailed in. Then come bondholders. If banks perform well, their bond prices rise and they gain from trading them for higher prices and from the higher coupons they get for accepting junior and subordinated claims compared to secured and senior bondholders.

The depositor is already short-changed by the high average inflation rate in the Indian economy. Second, banks are willing to cut deposit rates faster than they cut lending rates when interest rates go down. Finally, bank depositors have no participation in the upside. Hence, to bail them in is against fairness and natural justice.

Third, if the creditors have to bear the consequences of the bank performing well, they should have a say in the running of the bank, through participation in the banks’ governance.

Fourth, the uncertain nature of the stock markets, the volatility involved and lack of proper knowledge, means that senior citizens and others have limited options for safe financial savings. Therefore to create doubts about the safety of their deposits when other financial systems are rigged against the unsuspecting investor is not fair.

Fifth, the stated goal of this government is to encourage the public to use banking channels for commercial transactions. The anxiety raised by the FRDI Bill negates this objective.

How would the deposits of micro and small enterprises be treated?

Resolution schemes and corporations are non-starters as long as the taxpayer is the dominant shareholder in the banking system. We request you to fix that before considering this Bill.

We also request you to  redraft clauses 52 and 53 of the proposed Bill. Make their provisions prospective and, even then, exclude depositors. If depositors have to be bailed in, the deposit insurance limit must be raised from the current limit of Rs. One Lakh to cover the entire amount of deposit a person has in a bank.

What the depositors need to hear in simple English (that is because the language of law in India is English) is that their deposits are safe and will not be part of the “bail-in”. It should be part of the provisions of the Bill.

We trust that you will give proper attention to all our suggestions made in this letter and do the needful to alleviate the fears of the common man regarding the FRDI Bill.

Regards,

For CONSUMER PROTECTION SERVICE COUNCIL,

Ganesh Gopal Joshi (9987086777)              Dayanand Nene ( 8879528575)

National President                                         National Secretary

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