Business as usual

Some provisions in the proposed Financial Resolution and Deposit Insurance (FRDI) Bill is being discussed at different forums and all these discussions highlight how the bank depositors will be at the receiving end, if the Bill becomes law. The discussion centres around the ‘bail in’ provision that is advocated as part of the bill. To appreciate the effect of the new Bill on the depositors, it is important to understand what exists today and then to compare the new provision with the existing one.

In India, between 1947 and 1969, 559 private banks had failed. Many common people lost their life’s savings during that period. Even after 1969, that is, after first the dose of nationalisation of banks, 23 banks were merged with public sector banks as they were in trouble. The failure of Global Trust Bank, whose chairman was awarded the banker of the year award just a year before bank’s failure is also green in our memory.

But after 1969, no commercial bank depositor has lost his money on account of failure of any bank. All along, the Reserve Bank of India closely monitors the functioning of banks and intervenes whenever required with different prescriptions like restriction to lend further, moratorium, mergers etc. The measures ensure the safety of depositors’ money.

Will the proposed Bill change this and make the depositors to sacrifice whenever a bank fails?

Let us take public sector banks first. For these banks, more than 51 per cent of the capital comes from the Government and the government controls these banks as owners. If any of these banks fail, the bank may be merged with any other solvent bank and hence there is no question of depositors loosing their money. The merged entity will take over the liability of the failed bank. In the 1980s, we saw the merger of New Bank of India with Punjab National Bank on these lines. Even if the bank is not merged with any other bank, there is the government to bail out and no sovereign government can afford to see a PSU bank fails to repay the deposit. The Government has got the wherewithal to tax people and use the taxpayers’ money to bail out the banks under its ownership. It enjoys the banks’ funds by way of Statutory Liquidity Reserve Ratio and the banks also participate in all the Government schemes and it is perfectly all right when the Government comes to the rescue of the banks when need arises.

The private banks are also under close supervision of the RBI. Whenever it feels a bank is likely to face problem, the RBI prescribes a moratorium and then ensures its merger with some other bank. We have seen 23 such mergers during the last 50 years.

But if a bank reaches a stage that it cannot be merged with any other bank due to its precarious position, what is the next course? It is nothing but liquidation. Here, the depositors will be paid as creditors after the other statutory obligation, like staff dues, government dues etc., of the bank is met with.

So even under the present set of legal framework, if a bank fails, depositors may have to forego their money. Under the new FRDI Bill, too, the depositors may have to forego their money. But the bank may continue operation after making the depositors to sacrifice their savings. The deposits may be converted as share capital. In sum, there is nothing new in the ‘bail-in’ provisions, which calls for any alarming reaction.