The proposed FRDI Bill in its current form could impact banks in a detrimental way

The Modi-led NDA government did not have to be on the defensive many a time, in its nearly four-year term. However, in the case of Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill), it is not rightly so.

The FRDI Bill was introduced in haste in the monsoon session of Parliament, 2017 on the penultimate day of the session. It was sent to a joint committee without a discussion. Parliamentary Standing Committee on Finance is the one, where such matters are conventionally referred to. There wasn’t much rhyme or reason why it was sent to a joint committee instead.

While it is projected as a radical step the Modi government took towards addressing the menace of non-performing assets (NPAs), it is based on the recommendations of a Financial Stability Board, formed post 2008 financial meltdown to ensure that governments would not end up bailing out such financial institutions, as done in the US then. As a part of G20 countries, India accepted the recommendations of the Board and it is manifested in the form of FRDI in India.

Hence, however loudly the government reiterates that depositors’ money is safe, and in fact it is further secured by this Bill, the bail-in clause of the Bill, where depositors’ money will be used to save a sinking bank (except a so-far undefined insured amount), converting their deposits to equity of that sinking bank is a pre-meditated move, with Bill’s primary objective of securing the government in such situations.

But the bail-in clause is not all about the Bill. A Resolution Corporation (RC) formed under this Bill will have unrestricted powers to act once a bank is deemed ‘critical’ and can access any information, terminate, transfer, sell the institution at its discretion. The RC has under its purview banks, insurance companies, Non-Banking Financial Companies (NBFC), holding companies, financial market infrastructures, systemically important financial institutions (SIFIs) and any other entity which may be notified by the central government for the purpose of resolution.

Undermining the powers of Reserve Bank of India (RBI), RC will be the one to supervise the functioning of the banks and would reduce the RBI to fiscal policy implementation, currency and interest rates like central banks in many countries post 2008 recession.

It is interesting that response to the growing concerns of people with the provisions of the Bill came not from the government, but from BJP. In a post in social media titled ‘Beware of Propaganda Being Spread Around FRDI Bill’ with Prime Minister Modi’s photo, it claimed that ‘it (Bill) is strengthening the mechanism to protect depositors’.  ‘Right of depositor will be fully protected at the time of legislation’ and ‘over 180 crore people get insurance’, it said. Far from the truth, these claims are hugely misleading.

“A Resolution Corporation (RC) formed under this Bill will have unrestricted powers to act once a bank is deemed ‘critical’ and can access any information, terminate, transfer, sell the institution at its discretion”

How would the Bill protect depositors when the Bill has provisions of bail-in (clause 52)? If the right of the depositor is fully protected, why is it not mentioned in the Bill? To ensure 180 crores, people, you do not need FRDI. The same number is already covered by Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961, which will be dissolved if FRDI Bill is enacted. In fact, DICGC has Rs. 7,16,322 million as investments. As on March 2017, the balance in Deposit Insurance Fund is Rs. 6,45,578.48 million and the balance in Credit Guarantee Fund is Rs.7,30,027.64 million. Except for few Cooperative Banks, no other banks have required claim from DICGC.

Why should DICGC be dissolved if it is functioning well?

A Bill of this nature, which in its current form could impact India’s banking system in a detrimental way, cannot be passed without a public debate, a process of wide consultations with all stakeholders, including the common people followed by a genuine Parliamentary scrutiny. The country, particularly small traders and the informal sector, is yet to recover from the tragedies of demonetisation and GST. Another burden through this Bill will not only burden them but will also trample the bedrock of the public sector banks (PSBs).

PSBs need help to tackle the crisis they are facing – most of which is the result of misplaced priorities and policies of the successive governments. Provisions of FRDI Bill if enacted will be the final blow to the PSBs.

The article first appeared here.

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