FRDI Bill — No one is taking your money. Let’s clear the air

The Financial Resolution and Deposit Insurance (FRDI) Bill is expected to be tabled in the winter session of the Parliament, which was initially tabled in the previous session of the Lok Sabha, later sent for review to the Joint Parliamentary Board. The major reason of writing this post is to clear the air about the bill, which is hyped by reading just once clause (bail-in clause) of the entire 100+ pages bill. I have received too many queries about this bill from my Quora followers, batchmates and other people who think (I still doubt it) I know quite a bit about the financial markets. I would write this post in a Question and Answer format based on my initial questions on this bill and addressing queries of all others. I don’t possess an economic degree of any sorts, so if any economist wants to correct my understanding, I am willing to learn. This post is aimed at giving a no-jargon understanding of the entire bill to my readers. Let’s clear the air. Modi is not going to take your money away. Enjoy.

 

FRDI

Financial Resolution and Deposit Insurance

 

Question: – What is the FRDI Bill?

Answer: – Financial Regulation and Deposit Insurance Bill is a law which is aimed at recovering the ailing banks, non-banking financial institutions, etc. before they reach a situation of a failed corporation by following some guidelines adopted in many developed nations across the globe and some nations of the G-20 club.

 

Question: – Which institutions come under the purview of this bill?

Answer: – The FRDI bill is expected to cover financial firms like banks, insurance companies, non-banking financial companies (NBFCs) and Stock Exchanges. The Resolution Corporation would oversee the performance of these banks which would replace the Deposit Insurance and Credit Guarantee Corporation (DICGC).

 

Question: – What mechanism is going to be adopted by the Resolution Corporation?

Answer: – The financial institutions according to the guidelines of the FRDI bill would categorize a financial institution as Low Risk, Medium Risk, Material Risk, Imminent Risk and Critical Risk. While the first two types of risks aren’t in the state of failure, the banks in Material and Imminent Risks would be advised to be resurrected, while financial institutions under Critical Risk would be taken over by the Resolution Corporation for reviving its business.

 

Question: – How does Critical Risk reviving work?

Answer: – In this step, there would be five options to the Resolution Corporation. They are listed below: –

  • Proposing a merger of the financial institution or putting it up for auction
  • Transfer of assets and liabilities to another financial institution as the brand of the company is no value to the new entity
  • Creation of a Bridge Service Provider who would handle the assets and the liabilities on behalf of the financial institutions
  • It can liquidate the firm if nothing is working out within the stipulated take-over of the bank within a year or so.
  • Use depositor’s money to bail-in the bank’s losses and steer its recovery. This clause has created an unrest amongst the public

 

Question: – This is against nationalization and motive behind demonetization?

Answer: – Indians couldn’t trust the private bank operators for the money as they had no surety on how it is used and how can it recovered. On 19th July, 1969 Mrs. Indira Gandhi-led government announced the nationalization of 14 commercial banks with immediate effect, accounting to 85% of the total deposits in the nation. This restored faith in the banking system in India. There was a huge outcry post-1991 when government reduced the stake in Public Sector Banks from 100% to 51%, but these banks still managed to sustain. Demonetization was mooted to push digital economy and this banking regulation is speeding up the process by bringing transparency in the banking system, which is the best alternative to cash.

 

Question: – Don’t speak like a spokesperson of the government?

Answer: – I am not doing that. Let me give you a very good example to support the argument. Subrato Roy promoted Sahara Life is an ailing insurance firm. The government wanted to safeguard the interests of the customers, so pushed ICICI Prudential Life to take over the business. Due to lack of a strong regulation, this is still pending at the cost of the customers of Sahara Life. This regulation is expected to speed up this process by jumping these hurdles.

 

Question: – Is India aiming to go the US way?

Answer: – 527 Banks have failed in the US since 2008, with 7 in 2017. In India, I don’t remember a scheduled commercial bank failing.

 

Question: – Sahara Life is one example. How would you justify that the government won’t use depositor’s money for recovering the losses of the banks. Why am I responsible for the non-payment of rich creditors?

Answer: – How many of you remember Global Trust Bank. Very few people. When I was a five year old kid, a stock broker Ketan Parekh ran a scam in which Global Trust Bank (based in Secunderabad) invested huge sums of money. As the market crashed, the bank owed a lot of money to many institutions like Goldman Sachs, International Finance Corporation, etc. The Reserve Bank of India stopped the failure of the bank by acquisition by Oriental Bank of Commerce in 2004, which took over the bank and expanded its presence in South India. This ensured safety of the deposits.

 

Question: – In the worst case scenario?

Answer: – While there are 67% of the total depositors in India with a Fixed Deposit below Rs.1 Lakh which is insured by the government by an institution setup in 1961 known as Deposit Insurance and Credit Guarantee Corporation (DICGC). This ceiling limit of insurance was put in 1993. With the dissolution of the DICGC with the upcoming Resolution Corporation, it is expected that the Rs.1 lakh as adjusted to the inflation with respect to 1993, would surely increase to Rs.3.5 Lakh, which would cover 85% of the total depositors. While coming to the deposits beyond the ceiling limit, no bank or the Resolution Corporation could exercise the bail-in option without the government’s approval. With 2.11 lakh crore infusions of funds for the resurrection of public sector banks and merger of small banks into one single entity, there seems to be minimum possibility of using depositors’ funds for bailing the bank.

 

Question: – But still there is a possibility of losing depositors money….?

Answer: – I am sorry to interrupt you in between. Let me tell you the story of CKP Co-operative Bank. While no one knows about this bank, it was a co-operative bank based in Mumbai Sub-urbs which was suffering financially since 2010. While the top brass insisted on non-withdrawal of funds, in 2014 the RBI imposed a restriction of withdrawal of Rs.100 per month from the ATMs, which caused many hurdles to the bank customers. Why RBI had to do it in the failure state of the co-operative banks across India? This is because there wasn’t any regulatory framework to face such an issue which is aimed through FRDI. Has any scheduled commercial bank faced such a situation? They would not face such a situation in the future too. The regulation is aimed at stopping the banks from resorting to such ideas by stating its illness beforehand and correcting it. Your money is not safe is just being specified by this bill. That’s it. It was the same situation before too. Life is not going to change at all for the depositors. Informed masses are reacting over the clause, which was quite evident with the failure of a bank.

 

Question: – Why is the BJP so interested in this?

Answer: – For your kind information, this wasn’t an idea of the BJP. Rather it was the idea out of the 2008 financial crisis, which recommended the establishment of a Financial Stability Board to keep a check on the ailing banks. UPA had just too much on its plate with Aadhar and other schemes; this government is attempting to take another step on the schemes like Aadhar to build a stronger mechanism for the depositors.

 

Question: – Then why did the bank employees and opposition protesting on this?

Answer: – Bank jobs are considered to be the safest jobs in India. This notion is going to change soon after the implementation of the bill. If a bank falls in critical risk or even imminent/material risk category, the authorities can reduce the bank staff or even cut-down on salaries and bonuses. Before putting hands on the depositors’ money, the jobs would go. This got the protests while the opposition has got some mileage with victory in by-elections and in Gujarat, so the protests have intensified.

 

Question: – How is this going to change the scenario?

Answer: – While I am looking at a bigger picture which everyone is missing out – NPAs. This bill will increase control of the regulatory bodies over the banks, to stop it from failing before a potential one as we see today with the situation of UCO Bank. Banks would fear giving out loans due to a boss continuously evaluating their performance. The government might then consider creation of a NPA resurrection plan like presently in place in developed nations. In Italy and Spain the government is already doing it by reviving the NPA by purchasing them and getting better output of them if possible. This process is called as secularization of NPAs, which has reduced the NPA percentages in countries like China and Korea. While I am open for opinions on my understanding of a future directive of this bill in the comments box.

 

Question: – Kamath, there is too much of an information to digest. Could you summarize the entire situation?

Answer: – With Pleasure. Here are few takeaways from the bill

  • Nobody is taking away your money
  • FRDI is a regulation which would keep a check on the ailing banks
  • Deposit insurance is expected to increase to Rs.3.5 lakh which would cover a larger portion of the depositors in the country
  • Investments in Mutual Funds and other instruments should be encouraged as the risk is the same in the banks and in other investments (I wouldn’t recommend gold)
  • This could be the road to change in the NPAs in India
  • No bank has failed in the Independent Indian history and it would never happen
  • Bail-in would be the last option which is quite impossible for a growing $2 trillion economy
  • It won’t be a cakewalk for Modi in 2019 if GST, Demonetization and the FRDI bill is campaigned well by the opposition as these measures cover all sections of the society, so we would be moving towards a two-party political situation or a hung assembly
  • India’s banks are the safest in the world as nationalized banks were created not to generate profit rather safeguard the money of the citizens of India.
  • Financial Resolution and Deposit Insurance — Read the name correctly. It is an resolution for banks and insurance for your deposits.

 

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