THE FINANCIAL RESOLUTION AND DEPOSIT INSURANCE
BILL, 2016
FRDI has
surfaced in the Social media recently, thanks to a petition through
change.org. It is only after seeing the
petition that I realized that I have already missed the window for offering
comment. It seems that FRDI did not
figure in the news media with the intensity and urgency that it deserved.
I have
downloaded the draft and browsed through it.
I also had to go through Banking Regulation Act to see the provisions in
this act relating to winding up of banking companies that will be deleted by
the proposed FRDI.
It cannot
be gainsaid that economy and banking are based mostly on trust which
governments and banks are under an absolute obligation to maintain and
bolster. Anything that even scratches
this trust can prove disastrous.
The
aforesaid is the reason that Capital Adequacy norms under the Basel Agreement
are being continually refined and enforced worldwide by banking
regulators. The underlying idea behind
Capital Adequacy norms is simple. Banks
have to use statistical tools to gauge the risk of losing money in their loans
and investments portfolios and then provide enough capital to cover these risks
so that the risk does not extend to the depositors. This tells depositors that banks and
regulators are dead serious about the safety of their money kept in the banks
and will not allow it to be risked.
RBI, the
regulator for the banking sector, has taken these norms in right earnest and
has mechanism for Risk Based Supervision RBS) in place. RBS ensures that no banks ever reaches the
brink where its liquidation has to be contemplated: And if it does, it loses no more than its
share capital. As against this, FRDI proposes to wait till the institution
reaches the brink and then pounce upon it and even breach the trust on which
the financial sector rests.
FRDI
proposes to move this risk assessment function to a Corporation. This hardly
makes sense. This Corporation will have
11 members on its Board. Of these 4 will
be representing the four regulatory authorities (Banking, Insurance, Pension, Financial
Markets.) The remaining seven will be bureaucrats and other government
appointees. RBI and its Risk Based
Supervision are working fine and cannot be bettered by this Corporation.
This
proposed Corporation seriously encroaches upon the turf and erodes the
credibility of regulators who are best placed to gauge and manage risk in their
specific areas. Though, their autonomy
may not be liked much by the political establishment.
The act is
strewn with provisions that make depositors suspicious and uneasy. Read the subsection 1.15.ii. It goes like this: Deposit means ………. but does
not include “any amount due on account of any deposit with any insured
service provider which has been specially exempted in this behalf by the
Corporation with the previous approval of the Appropriate Regulator or, by a
notification in the Official Gazette.” Thus the corporation may, in its bureaucratic
wisdom, exempt FD or / and RDs through a notification. By the time this notification comes to our
knowledge, the money would be gone.
The dreaded
bail-in that forms the subject matter of section 52, is defined as under.
52.3 A bail-in provision means any or a
combination of the following: –
(a) a provision cancelling a liability owed by
a covered service provider;
(b) a provision modifying, or changing the form
of, a liability owed by a covered service provider
(c) a provision that a contract or agreement
under which a covered service provider has a liability is to have effect as if
a specified right had been exercised under it.
In case of
depositors, these means that your account balance could be written-down or written-off
straight away, or could be swapped for shares in the worthless bank! I am not able to make out what the
subsubsection c means. I guess that for
FDs it could mean that your right to premature payment could be exercised by
the Corporation.
There is a
saving grace, though, in the form of section 55. The relevant portion reads as under:
55.2.b "only
those liabilities may be cancelled the instrument creating which contain a
provision to the effect that the parties to the contract agree that the
liability is eligible to be the subject of a bail-in."
If the
proposed Bill goes through, we can be sure that account opening forms of banks
will include a fine print saying that this deposit is eligible to be the
subject of a bail-in. While big
depositors may be able to negotiate this clause out, the same leeway may not be
available to people like us.
If the Bill
goes through, even the existing depositors may get a communication congratulating
them and announcing that their deposits have been made eligible for a bail-in!
Further,
the proposed Bill effectively does away with Deposit Insurance. As banks pay premium for this insurance, in
the unlikely event of a bank reneging on its deposits, the insured amount must
be paid by the insurer from its own funds.
The depositors then have to salvage whatever they can of their deposit
from the liquidation proceeds. This bill
says that the first thing to be recovered by the Resolution Corporation from
liquidation proceeds will be the amount it has paid to the depositors under the
insurance scheme!! (Sec 29.4)
Also
section 55 (1b and 1c) puts depositors and other creditors on the same footing,
whereas the deleted sections of the Banking Regulation Act clearly state that
depositors have to have the first preference.
FRDI also
seeks to replace common sense with red tape.
Sec 68.1.3 states that, “A depositor or operational creditor may
submit a claim to the liquidator in such form and in such manner and along with
such supporting documents required to prove the claim as may be specified by
the Board.” Whereas the Banking
Regulation Act clearly stated that depositors need not submit any claim and the
balance in the books of the Bank will be automatically taken as the claimed
amount. Well, red tape is the first
thing to be brought in by a bureaucrat ruled organization.
To sum up,
the following questions on FRDI needs an answer from the government:
- Basel Accord on Capital Adequacy and the current Risk Based Supervision are meant to ensure that a bank never reaches a stage where depositors’ money is jeopardised. If, at all, it has to be liquidated it must not lose more than its capital. In this regime where is the need for FRDI?
- The Resolution Corporation is a serious encroachment on Regulator’s turf.
- How is the Resolution Corporation supposed to carry out liquidation or merger of banks any better than the Regulators when bureaucrats and government nominees far exceed the regulators’ representatives on its board?
