This newspaper has previously argued that the fears raised on account of the ‘bail-in’ clause in the Financial Resolution and Deposit Insurance (FRDI) Bill in case of a bank failure were vastly exaggerated. Indeed, while bank depositors are, right now, on a par with unsecured creditors should a bank fail, FRDI actually plans to make them a bit more secure by proposing that bank depositors be placed after employees and secured creditors, but before unsecured creditors and the state/central government and, of course, equity and preference capital. While the economic affairs secretary has done well to tweet that there is “no likelihood of bail in for over 98% of depositors …(and) remaining also subject to bail-in (only) if the depositors consent”, it cannot in fact be any other way. If a bail-in of bank deposits to rescue a failing bank was a possibility, large depositors would flee banks, especially the weaker ones, and this would make them collapse even if their operations were otherwise sound. And keep in mind, such bail-ins cannot be done on the sly, depositor categories that can be bailed-in have to be notified upfront, according to the FRDI Bill.
Bank failures, of course, are rare in India since, when banks have looked weak in the past, RBI has managed to arrange for a healthy bank to buy them over. The fact that the Deposit Insurance and Credit Guarantee Corporation’s (DICGC)—the organisation that insures deposits—premium income rose from Rs 5,640 crore in FY12 to Rs 10,100 crore in FY17 but payouts on account of insurance claims fell from Rs 357 crore to minus Rs 27 crore in the same period makes this clear. As a result, including the investment income from DICGC’s reserves, its pre-tax revenue surpluses rose from Rs 6,001 crore to Rs 15,720 crore over the same period.
Even if bank failures, and therefore the possibilities of a bail-in, are rare, though, what depositors should worry about is how secure their deposits are today, before the much-derided FRDI comes into being. Right now, in the event of a bank failure, just Rs 1 lakh is insured with the DICGC even though the insurance premium is a mere 0.1%. In terms of the number of deposits, the amount looks reasonable since the DICGC’s annual report tells us that over 92% of all bank accounts in the country have deposits—current, savings, fixed—of less than Rs 1 lakh. The story in terms of the amounts involved, however, is very different.
While around two-thirds of the deposits were insured in 1993 when the deposit insured was raised to Rs 1 lakh, that amount is down to less than 30% today. Given the deposit insured was hiked to Rs 1 lakh in 1993 and that per capita incomes have risen 13-14 times since, the bank deposit insurance cover should have gone up by this amount—RBI does not make public the data on deposits of various types by their size. That this has not happened, of course, shouldn’t be too much of a surprise since, over the years, successive governments have been more concerned about the rights of the poor and so are not particularly focused on the bank deposits of the rich. Those governments, or others who subscribe to this view, however, must keep in mind that the banking system will take a big hit if the rich lost faith and didn’t keep their money in banks.