FRDI BILL IN PARLIAMENT AND THE DEBATE
The concept of protecting the public deposits with the banks came up after the banking crises in Bengal in 1948. The Rural Banking Enquiry Committee set up in 1950 recommended various measures to protect the interests of the depositors with commercial banks which included insuring the deposits with the commercial banks. But this idea got further cemented after the Pala Central Bank Ltd. in Kerala and the Lakshmi Bank Ltd. crashed, It forced the hands of the government and a bill was submitted to the parliament during August 1961 and the Deposit Insurance Corporation came into being as and from 1st January 1962. Another Corporation that was formed in 1971 viz. Credit Guarantee Corporation was merged with DIC and it came to be known as DICGC from 1978. From a small amount at the time of inception of the corporation the amount of insurance coverage of deposit with the banks has been progressively increased to Rs. 100,000/- in 1993.
Presently the government has been planning to table a bill in the parliament titled Financial Resolution and Deposit Insurance Bill, 2017 in the ensuing session. There has been lots of discussion on the bill and some perceived fears are being transmitted across the country through the main stream media and the social media. The attempts of the parties involved in the propagation of this negative views against the bill seems to have not taken into account the clarification and assurances given by the finance minister and the prime minister. As per the latest information the bill has been referred to the parliamentary select committee on finance. Many hope that the select committee calls for views from all stake holders to the bill before finalising the bill for presentation in the budget session.
The Banking in the country has been heavily tilted in favour of state owned sector. More than three quarters of the banking is done by the state sector banks. A large section of the public do not have access to the banking system despite the government push to get every one a bank account. The quantum of insured amount is very low compared to the present saving potential of the public and the average amount of deposit in the banking system. The educational level of the public is not very high with almost a tenth or more of the population still remain illiterate across the country. Even in states where considerable improvement has happened in literacy, the financial education remain a distant dream. Many of the bank account holders do not know the amount of bank deposit insured. In this background, the bail in clause as in the case of some of the western countries to toe the diktats of the IMF and World Bank stipulation is like making the people lose faith in the banking system as a whole and allow the efforts of the government to reduce the cash transactions a failure.
The UPA during its decade long tenure did not bother introduce this reform in the finance sector fearing that it will have disastrous effects for its continuance in office or in the hustings. Is it foolhardy on the part of BJP to tinker with this particular reform as part of major reforms that it has undertaken? From the perspectives of one of the celebrated finance professionals, the bill in its present form with the bail-in clause is obnoxious.
There was a case of a bank in Cyprus called the Laiki Bank which was the second most popular bank in that country. This bank failed and the central bank of the country, the Cyprus Bank offered the depositors of this bank, its own equity of 4.8% maximum based on the uninsured portion of the deposit with the Leiki Bank. The insured portion of the bank deposits in Cyprus continues to be Euro 100,000/- (equivalent approximately to INR 80,00,000/-). The bank in question collapsed as part of the US sub prime crisis and major bank failure in the EU. There was a bailout of the country by the EU on the condition of this bail-in put in place by the government of Cyprus. This is often quoted by the pundits who debate against the bail-in clause.
The deposit insurance is available only for bank deposit. There are huge number of non banking finance companies who collect deposit from public which are not covered under the deposit insurance scheme of DICGC. Therefore, to bring all the depositors of all finance schemes be it a bank, or non bank finance company or insurance company, there is a need for an umbrella act to provide for insurance and protect the interests of the investors. This is the argument of the often quoted by the pundits who debate for the bail-in clause.
It is a fact that the interests of depositors in other financial venture have to be protected. But the insured amount has to be substantially increased as it is done in US in the aftermath of the banking crisis in 2007-08. US revised the insured amount from USD 100,000/- to USD 250,000/- (approximately equivalent to INR 1,55,00,000/-). Such advanced economies take proactive steps to increase the insured amount in bank deposit substantially, it is expected that India will take adequate measure to increase the present paltry amount of INR 100,000/- to at least INR 1,00,00,000/-. Moreover, in India the amount of deposit in one bank in different accounts are clubbed to determine the insured amount. Whereas in US and other developed economies, the investors' interest is taken care by assessing the insured amount separately on each account.
When the present administration is gearing to reduce the number of banks to manageable 5 or 6 in state sector by merging different banks together, it is high time some proactive increase in the insured amount is increased substantially and each account is treated separately instead of clubbing all the accounts in a bank together for this purpose. That way the interests of the depositors in the banks will be better served and protected.
Do we require the bail-in clause at all? The author is the of opinion that the bail-in clause is totally unwarranted at the present juncture for the following reasons:
1. the country and its economy has not graduated to the extent of even 50% of the western economies
2. the bank failures that had happened in the past have been addressed adequately by the RBI,
3. the bail-in clause will defeat the very purpose of the government's move to bring in more digital payments
4. war against corruption by reducing the cash transactions will be defeated.
The major fall out will be that most of the depositors especially in rural areas will remove the deposit from the banks and either keep them as cash at home or convert them to other assets like real estate and gold. Both scenarios are not good for the country's economy. Despite the still resistance to the bail-in clause, if the government goes ahead with that at the behest of IMF and World Bank, then it will be akin to adopting European emission standards for automobiles and the MVR is tweaked to make it mandatory for 24/7/365 headlight on for all the two wheeled motorcycles, scooters, etc. sold on and from 1st April 2018.
The Banking in the country has been heavily tilted in favour of state owned sector. More than three quarters of the banking is done by the state sector banks. A large section of the public do not have access to the banking system despite the government push to get every one a bank account. The quantum of insured amount is very low compared to the present saving potential of the public and the average amount of deposit in the banking system. The educational level of the public is not very high with almost a tenth or more of the population still remain illiterate across the country. Even in states where considerable improvement has happened in literacy, the financial education remain a distant dream. Many of the bank account holders do not know the amount of bank deposit insured. In this background, the bail in clause as in the case of some of the western countries to toe the diktats of the IMF and World Bank stipulation is like making the people lose faith in the banking system as a whole and allow the efforts of the government to reduce the cash transactions a failure.
The UPA during its decade long tenure did not bother introduce this reform in the finance sector fearing that it will have disastrous effects for its continuance in office or in the hustings. Is it foolhardy on the part of BJP to tinker with this particular reform as part of major reforms that it has undertaken? From the perspectives of one of the celebrated finance professionals, the bill in its present form with the bail-in clause is obnoxious.
There was a case of a bank in Cyprus called the Laiki Bank which was the second most popular bank in that country. This bank failed and the central bank of the country, the Cyprus Bank offered the depositors of this bank, its own equity of 4.8% maximum based on the uninsured portion of the deposit with the Leiki Bank. The insured portion of the bank deposits in Cyprus continues to be Euro 100,000/- (equivalent approximately to INR 80,00,000/-). The bank in question collapsed as part of the US sub prime crisis and major bank failure in the EU. There was a bailout of the country by the EU on the condition of this bail-in put in place by the government of Cyprus. This is often quoted by the pundits who debate against the bail-in clause.
The deposit insurance is available only for bank deposit. There are huge number of non banking finance companies who collect deposit from public which are not covered under the deposit insurance scheme of DICGC. Therefore, to bring all the depositors of all finance schemes be it a bank, or non bank finance company or insurance company, there is a need for an umbrella act to provide for insurance and protect the interests of the investors. This is the argument of the often quoted by the pundits who debate for the bail-in clause.
It is a fact that the interests of depositors in other financial venture have to be protected. But the insured amount has to be substantially increased as it is done in US in the aftermath of the banking crisis in 2007-08. US revised the insured amount from USD 100,000/- to USD 250,000/- (approximately equivalent to INR 1,55,00,000/-). Such advanced economies take proactive steps to increase the insured amount in bank deposit substantially, it is expected that India will take adequate measure to increase the present paltry amount of INR 100,000/- to at least INR 1,00,00,000/-. Moreover, in India the amount of deposit in one bank in different accounts are clubbed to determine the insured amount. Whereas in US and other developed economies, the investors' interest is taken care by assessing the insured amount separately on each account.
When the present administration is gearing to reduce the number of banks to manageable 5 or 6 in state sector by merging different banks together, it is high time some proactive increase in the insured amount is increased substantially and each account is treated separately instead of clubbing all the accounts in a bank together for this purpose. That way the interests of the depositors in the banks will be better served and protected.
Do we require the bail-in clause at all? The author is the of opinion that the bail-in clause is totally unwarranted at the present juncture for the following reasons:
1. the country and its economy has not graduated to the extent of even 50% of the western economies
2. the bank failures that had happened in the past have been addressed adequately by the RBI,
3. the bail-in clause will defeat the very purpose of the government's move to bring in more digital payments
4. war against corruption by reducing the cash transactions will be defeated.
The major fall out will be that most of the depositors especially in rural areas will remove the deposit from the banks and either keep them as cash at home or convert them to other assets like real estate and gold. Both scenarios are not good for the country's economy. Despite the still resistance to the bail-in clause, if the government goes ahead with that at the behest of IMF and World Bank, then it will be akin to adopting European emission standards for automobiles and the MVR is tweaked to make it mandatory for 24/7/365 headlight on for all the two wheeled motorcycles, scooters, etc. sold on and from 1st April 2018.
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