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Banking Reforms in India: Outcry against FRDI Bill and Bail-in Without Basis

Founder and CEO, Transfin.
Dec 12, 2017 10:51 AM 3 min read
Editorial

One obviously reads how social media and technology have the power to breed beliefs only qualifiable as post-truth. However, rare have been occasions when I witnessed this phenomenon first hand.

 

The recent public outcry on deposits being “at risk” during a bank liquidation as per the proposed Financial Resolution and Deposit Insurance (FRDI) Bill is astounding.

 

What started as an op-ed in The Hindu blandly-titled “Banking on legislation” (published on November 9th – full 3 months after the FRDI Bill was tabled) vigorously picked up steam courtesy a dramatically worded WhatsApp cover note (screenshot below) which termed the bail-in clause as a “banking Armageddon amendment”.

Outcry on FRDI Bill escalated thanks to a catchy WhatsApp message

 

The sensationalist delivery has obviously worked, as one month later we have the Finance Minister of the country being forced to intervene and calm everyone’s nerves. The political timing, on the other hand, should obviously give makers of House of Cards another reason to blush.

 

Coming back to the actual Bill, the only logical way to look at the issue at hand is to see how it compares to the situation before this document came into the picture.

 

Before November 2017, deposits in the Indian banking system, much like rest of the world, were treated as the most “senior” form of liability for a bank, and hence were supposed to take losses only after the entire equity (i.e. regulatory capital) followed by all wholesale funding of the bank in question is wiped off due to write-downs of loans during liquidation. In all practical terms, the Reserve Bank of India (RBI), being the prudent institution that it is, would in any case intervene (especially in case of public sector banks) if the capital goes dramatically low to bail it out. Moreover, deposits amounting to a not so royal amount of INR1L were mandatorily “protected” through “Deposit Insurance”, even if rest of the deposits are otherwise hit. The marginal quanta of insured deposits, though inadequate and worrying, is a different debate altogether.

 

Come the WhatsApp storm of Nov’17, let’s see what is so different about the FRDI Bill? Not much. All the Bill does is to formalise the process which existed previously. Insured deposits will still be mandatorily protected. The cap of INR1L has been suggested to be replaced by a flexible mechanism where the insured sum is decided on a case-by-case manner. And yes, this process now has a name i.e. “bail-in”, in line with International precedents.

 

One can obviously debate against the insufficient protection for depositors, but has anything really become worse due to the introduction of this particular Bill? Deposit holders have been and will always be under a certain level of risk, but that is how the banking system works. It is a positive move to at least specify in writing the mechanism for resolution whenever that contingency arises. Rest of the narrative is plain hyperbole.