The world of Rajaram Shinde is changing. The retired central government official is moving his money from State Bank of India to Kotak. Mr Shinde is not exactly enamoured by the advertisements of the private sector lender or its promises. He is not a demanding customer, has no fancy needs. But, like everyone with a bank account, there’s one thing he believes is non-negotiable: the safety of his money. Not that he ever felt there was a concern. Until now.
It all began with strange WhatsApp messages. He ignored them. What he couldn’t disregard were unbelievable stories in large, mainline English and Marathi newspapers. The reports talked about a new Bill, which once enacted, could freeze — at least temporarily — or even knock off a slice of deposits of a troubled bank. The objective is to save the bank by making depositors pay.
Having stayed away from co-operative banks, which are often the preferred choice of many in western India despite a few failures, it never crossed his mind that high-street, government-owned banks could do the same.
But then, here’s a Bill that would apply to all financial institutions, including public sector as well as private banks; so it made perfect sense for Mr Shinde, who after checking the stock and financial performance of Kotak — the bank with a branch that’s nearest to his home — to think of gradually shifting his savings to a healthy private bank. After all, if the government chooses not back a bank where it’s the majority owner, why not move to a strong private bank?
To many, Mr Shinde’s decision could appear like an extreme step taken by a libertarian who abandons fiat currency — out of distrust towards inept central banks and stodgy governments — to convert his savings into bitcoin or gold. But that would be unfairly judging a pensioner who is shaken and puzzled by a Bill.
Letting it drift
In all likelihood such a law, at least in its present form, may never see the light of the day. But what’s bewildering is Mr Shinde’s suspicion that it could. (Will the dull-sounding Financial Resolution & Deposit Insurance or FRDI Bill turn out to be DeMo 2.0?)
After going unnoticed for months, the Bill suddenly began making news around November 8, an ominous date. For a week it was confined to social media chatter and the world of instant messages. There was very little assurance from the government.
Soon, mainstream media caught on. Despite the excitement around eminently newsy stuff like the Bankruptcy Code and Gujarat elections, newspapers and television headlines ran headlines and tickers like, “Is your deposit safe?” Still, New Delhi didn’t quite get it. Last week, the finance ministry released a statement saying, “The FRDI Bill 2017 is far more depositor-friendly than many other jurisdictions, which provide for statutory bail-in, where consent of creditors/depositors is not required for bail-in.”
What jurisdictions are we talking about? Cyprus? Greece? Advanced economies, which had passed such a law, have rarely, if ever, used it. The ministry’s statement probably means that the Bill is better than the law in Cyprus which was invoked a few years ago to keep banks afloat. Does it really mean much? It’s certainly not enough to comfort Mr Shinde and savers like him with their nest egg lying in some bank. Finally, on Monday, the finance minister assured that the government will fully protect the public’s deposits in financial institutions. He couldn’t have done anything else, and going by his words the Bill is in for drastic changes.
It’s a bizarre turn of events. Never before did the finance minister of a country — with a stable government, booming stock market, and one of the fastest GDP growth rates — had to assure the public about the safety of their bank deposits. Why did it happen?
Probably the government felt that a debate on ‘how to bail-in (instead of bail-out) banks’ has become an imperative. Just like the resolution plan for bankrupt borrower manufacturers, there should be a law backing resolution for lender banks. But it’s a debate which, if gathers heat, can take us into an absolutely uncharted territory.
Trust in banks has been the strongest trait of the modern Indian financial system. No PSU bank — even the ones with eroded capital, unpaid loans, and damaging scandals — ever suffered a run simply because of the state’s backing. Successive governments and the RBI have been calm and quick in dealing with private banks that failed or faced panicky depositors. Such bail outs were probably unfair to tax payers. But handling the consequences of letting banks fail or saving them with depositors’ money can be far more challenging.
The FRDI Bill is not the need of the hour. Luckily, not too many people have taken it seriously. But that can change. If New Delhi thinks it’s testing the waters, it is mistaken. It’s playing with fire.
(Views expressed above are the author’s own)