The Centre and the JPC must allay depositor concerns on bail-in, in the FRDI Bill
There is furious public debate around the Financial Resolution and Deposit Insurance (FRDI) Bill tabled in August and now under the scrutiny of a Joint Parliamentary Committee. The Bill seeks to lay down a clear resolution mechanism for banks and financial firms in the case of default and this is welcome. But there’s one clause that is sending ripples of unease among savers. Clause 52 of the Bill empowers the Resolution Corporation overseeing bank defaults to use a bail-in provision against creditors to absorb losses. In invoking this bail-in, the Corporation can cancel any of the bank’s liabilities or change their terms. The Bill also seeks to repeal the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act of 1961, handing over this role to the new Resolution Corporation. Speculation is rife that the Centre is planning to take the route taken by regimes such as Cyprus, where public deposits were cancelled to fund bank haircuts on bad loans.
No doubt, some of the alarmist headlines arise from an incomplete reading of the draft Bill. For one, clause 52 clearly exempts deposits covered by deposit insurance from the purview of bail-ins. Two, the Bill requires banks to first incorporate a bail-in clause into their creditor contracts. Three, even today, depositors in Indian banks are protected only to the extent of the insurance cover provided by the DICGC which stands at ₹1 lakh per bank. Depositors who hold in excess of this can even today be subjected to ‘bail-in’ if a bank fails. In truth though, with public sector banks (PSBs) holding the lion’s share of deposits and the RBI stepping in to rescue shaky banks in the past, most Indian savers are unaware of this rule and put faith in banks presuming an implicit sovereign guarantee. But given the precarious state of some PSB balance sheets, and the fact that crores of Indians have just embraced banking through the Jan Dhan Yojana, this is a particularly bad time for lawmakers to test this faith. The Centre should redraft the ambiguously worded portions of the Bill to clarify if deposits will be subject to bail-ins, and if so, with what basic protections.
The recent clarification from the finance ministry doesn’t fully address saver concerns. Asserting that the FRDI Bill provides ‘additional protections’ to depositors, it doesn’t elaborate on what these are. It says that FRDI bail-in provisions are far friendlier than other jurisdictions, but depositors are more worried about changes to their status quo. The reiteration of the sovereign guarantee to PSBs is reassuring, but informed depositors may like more details about how the insurance mechanism will change under the FRDI and the extent of discretionary powers to the Resolution Corporation. The time is also ripe to sharply increase the measly deposit insurance cover of ₹1 lakh per depositor set over two decades ago. The JPC must incorporate these aspects into its ongoing review of the FRDI Bill.