Though the government has issued a clarification, not too many seem convinced by it, and the dominant narrative remains one of how, in the event of a bank failure, depositors’ money will be used to meet its liabilities—the deposits will be ‘bailed-in’, to use the term used by the Financial Resolution and Deposit Insurance (FRDI) Bill. Nothing could be further from the truth, for a variety of reasons. To understand this, first examine the current situation where up to Rs 1 lakh of bank deposits are insured with the Deposit Insurance and Credit Guarantee Corporation (DICGS). The amount is outdated since this was last fixed in 1993, but with no government raising this limit, in the event of a bank failure, depositors will get back just Rs 1 lakh immediately—for the rest, they have to wait their turn in the bankruptcy court though, as Business Standard points out, the amount covered by the insurance is enough to cover 92% of all bank accounts. Critics make it seem a bank failure is something routine, unmindful of the fact that RBI has not allowed this so far, but ignore this for the sake of argument and assume a bank does fail. Right now, apart from this Rs 1 lakh, bank depositors come very low in the list of those whose money will be returned once the bank is liquidated—they are on a par with unsecured creditors. Section 80 of the FRDI, on the other hand, proposes that bank depositors be placed after employees and secured creditors, but before unsecured creditors and the state/central government and, of course, preference/equity shareholders—that is, they are being moved up the pecking order.
While critics assume all deposits over Rs 1 lakh will automatically be ‘bailed-in’, this is actually a decision that will be taken by the Resolution Corporation (RC) set up to oversee the liquidation and Section 52(4) of the FRDI is quite clear that RC will specify which ‘liabilities or classes of liabilities’ may be subject to bail-in. Now, just ssume that bank deposits are specified by RC as being liable for a ‘bail-in’. What is the first thing big depositors will do? They will withdraw their deposits and even healthy banks will face trouble; so which RC will do this, especially since this has to be done in conjunction with RBI?
This proviso is reinforced elsewhere in the Bill. Section 55(2) makes it clear that no liabilities—such as bank deposits—can be cancelled unless there is a ‘provision to the effect that the parties to the contract agree to the liability being eligible for a bail-in’. That is, RC cannot suddenly decide that your deposits—above Rs 1 lakh—can be ‘bailed in’. This will have to be an explicit part of the terms a depositor signs before placing deposits in a bank. Once it is made clear that deposits can be ‘bailed-in’ when a bank runs into trouble, which depositor is going to keep deposits in a bank, no matter how solid it is? Apart from the fact that no democratic government can possibly survive appropriating people’s money—unless it is black money, and that is a different procedure altogether—since this will put the entire banking system at risk, where is the question of doing this? It is true the government hasn’t done a great job of explaining how the Bill helps depositors and why their money won’t be ‘bailed-in’, but critics haven’t applied their minds either.