By M. J. Aslam
The idea of having the law of the Financial Resolution and Deposit Insurance Bill, 2017/FRDI dates back to the global financial crisis of 2008 when Lehman Brothers collapsed which was followed by 2011 G-20 summit in Cannes where India agreed with other members that it would bring in a law providing for risk to viability of its banking institutions by strengthening “financial regulations”. The purpose is to learn lesson from that global meltdown lest the nations are caught unawares by re-emergence of any such financial crisis in future. The financial failure of companies, firms & individuals is taken care of by an elaborate mechanism provided for in the Bankruptcy & Insolvency Code, 2016. But the banking institutions, insurance companies, financial corporations, NBFCs & stock exchanges are not like ordinary companies the insolvency issues whereof could be settled under the IB Code, 2016. The banks are repositories of public trust & faith. Hence, standing on higher pedestal of treatment & priority. The FRDI Bill intends to maintain such public confidence in banking institutions of India. It proposes to create a legal framework for supervising the banks & other above named institutions in case of insolvency & provides for resolution of insolvency before a bank, etc, goes bust. These financial institutions are interconnected like a chain of rings. Shock to any one ring will shake the entire chain which represents financial system of a country like India . The banking institutions are backbone of financial stability of India.
What is the issue then? Apart from a concern shared by some experts that the proposed Resolution Corporation under the Bill is likely to downplay the RBI & usurp its powers, (The Telegraph dated 25-12-2017), the main hullabaloo raised about the draft law is its “bail-in” clause 52.
Under clause 52, the resolution process of a failing banking institution can be done by what is called writing down of its liabilities (deposits) by the Resolution Corporation. The writing down of the liabilities includes cancelling of liabilities. The cancellation of liability can be done by changing nature of liability or modifying or converting liability.
On a plain reading of clause 52, it is manifest that a struggling banking institution is not empowered, at its own, under the draft law to bail-in the depositors’ money for pulling itself out of crisis. Actually, a GOI Corporation by the name of the Resolution Corporation is proposed to be established by issuing notification under clause 3. It is only that proposed Resolution Corporation that is empowered under it to resolve the stressed assets of a bank. It can do so by following a number of measures including bailing-in of depositors’ money for solving insolvency issue threatening the viability of a bank. The Resolution Corporation has to proceed, however, with bail-in process of deposits in consultation with the RBI and after specifying by regulations the deposits that will be subject to bail-in mechanism. It implies that the proposal of bail-in deposits will be put to the knowledge of the public by public notice. The Resolution Corporation that has to prepare bail-in instrument under the draft law is bound to send a report explaining why the proposed bail-in instrument is required for a banking institution & the report is required to be placed before both Houses of Parliament for discussion, and naturally, for approval otherwise mere placement of report does not carry any meaning.
The bail-in tool shall not apply to the deposits to the extent they are covered by deposit insurance. The draft bill does not specify the limit of the deposits upto which they are protected under insurance guarantee. At present, each depositor can be protected only up to a limit of Rs. 1 lakh by the insurance guarantee of the Deposit Insurance and Credit Guarantee Corporation/DICGC while deposits beyond Rs. 1 lakh in banks do not have any deposit protection guarantee and are treated at par with claims of unsecured creditors as of now under the law. DICGC Act, 1961 is not intended to be replaced by the bill but the functioning of DICGC is proposed to be made subject to the control of the Resolution Corporation. However, the limit of protection under guarantee insurance needs to be increased under the DICG Act or the FRDI bill if passed by the Parliament.
It may be noticed that bail-in is not recapitalisation of the bank under risk. In recapitalisation the government directly pumps in equity from budget to bring the bank out of a financial quagmire lest it goes bust. This injection of capital is called bail-out which is done by the government by lending a loan or purchasing new shares in the bank. Bail-out is a sovereign prerogative of the government which does not require any legislation & which remains intact. This is a traditional method of resolving financial crisis of a bank by the government at its own. This is an out-house practice of helping a struggling institution. Other non-traditional mechanism, first used in 2013 by Cyprus, for stabilising failing banks is bail-in tool where in-house resources of deposits are used to secure stability and viability of a bank. Subject to the conditions prescribed in the draft bill, India is likely to follow this modern method of bail-in for solving stressed assets crisis.
We have mentioned of a meager limit of secured deposits upto Rs.1.00 lakh at present under the law. Apart from that the DICGC insurance guarantee limit on deposits is old, it is also a fact that demonetisation has brought huge deposits within the control of the banks. This objective of ending menace of unaccounted money will be reversed if the insurance guarantee limit of deposits is not raised to a reasonable extent. Limit may be increased to a reasonable extent to keep the trust of common people alive in banking business. Big defaults of bank money are committed by big business-corporate-houses, industrialists & traders. The small deposits of customers who deposit their hard earned savings in banks should not be sacrificed for paying off bad debts of big defaulters of the banks. The deposits of pensioners, retired, elderly & senior citizens should not be subject to bail-in clause. Any attempt or apprehension even to bail-in deposits in general will force depositors to withdraw their money from banks & invest in gold, land & other assets.
The FRDI Bill has been sent to the Joint Parliamentary Committee & it was proposed to be placed before Parliament in winter session with report of the JP Committee. However, in view of lot of opposition to the Bill about its bail-in clause by the opposition parties & public, the JP Committee has sought more time to deliberate upon the Bill especially clause 52 & will submit it now with its report in 2018 Budget Session of Parliament.