Banks under stress, stir brewing

C.H. Venkatachalam

The Cabinet approved the FRDI Bill (Financial Resolution & Deposit Insurance Bill) and thereafter the Bill was introduced in the Parliament on the last day of the last Session and now the Bill has been referred to the Joint Parliamentary Committee.
The Bill has created widespread fear, apprehension and panic amongst the depositors that the government is contemplating to liquidate the banks and the deposits of the banks will not be returned because of the Bail-in Clause of the Bill.
In March 2016, a committee was set up under the chairmanship of Ajay Tyagi, additional secretary, department of economic affairs, ministry of finance, to draft and submit the Bill. The draft of Financial Resolution and Deposit Insurance Bill 2017 was drawn up based on the recommendations of this committee. After considering the suggestions, the Union Cabinet approved the introduction of FRDI Bill 2017 in the Parliament.
The Bill provides for setting up a new authority Financial Resolution Corporation which will deal with liquidation and resolution of banks, insurance and other financial institutions.
This FRC will supersede the powers of RBI and other agencies dealing with the problem at present. Deposit Insurance Corporation guarantees Deposits up to Rs. 1 lakh per customer. This will be closed down and the FRC will decide the amount now.
Even the ceiling of Rs. one lakh per customer has no meaning now. This was fixed in 1993. Today 2125 commercial banks and cooperative banks, etc. are covered under Deposit Insurance Corporation covering total deposits of Rs. 103 lakh crores. Out of this, under the present scheme with the ceiling of Rs. 1 lakh per customer, only Rs. 30 lakh crores are covered under insurance. Balance deposits are not covered even today.
There is a need to cover the entire deposits of the banks so that in a country like India, common people feel assured of their hard-earned savings and there is no threat to their deposits.
Instead, FRDI Bill is talking of removing even the existing ceiling of Rs. 1 lac. Government should clarify on this to the people.
In addition, the FRC has power to liquidate any bank. The FRC can permit to use the depositors’ money to bail-in a bank. This provision is creating doubt and panic in the minds of every one.
In India, between 1913 to 1960, nearly 1600 private banks failed, and closed down. Depositors lost all their money kept in the banks.
Hence AIBEA took up the issue in Parliament and an amendment was made to Banking Regulations Act in 1960 by which any Bank failing will be put on moratorium and merged with another Bank. That is why since then, in the last more than 55 years, though many private banks faced liquidation, all these banks were merged with another bank and no bank has been liquidated since then. No depositor has lost his/her money.
(Banks failed but merged with other Banks during the last 50 years: Bank of Bihar, Belgaum Bank, Lakshmi Commercial Bank, Miraj State Bank, Hindustan Commercial Bank, Traders Bank, Bank of Tamilnad, Bank of Thanjavur, Parur Central Bank, Purbanchal Bank, Bank of Karad, Kashinath Seth Bank, Bariely Bank, Sikkim Bank, Benaras State Bank, Nedungadi Bank, Global Trust Bank, United Western Bank, etc).
All these banks were protected under Banking Regulations Act and merged with other banks and hence people did not lose a single rupee because of their failure.
Instead of taking stringent measures to recover the huge bad loans from the big corporate companies and other major defaulters and strengthening the banks, the government is bringing this FRDI Bill to oblige the IMF and succumbing to the pressures of the Financial Stability Board. This Act is required for those countries where the banks are in private hands and where the regulations on banks are liberalized.
In India, our banks are insulated because of our strong regulations and predominantly, our banks are in public sector enjoying the sovereign guarantee of the government.
Hence question of liquidation of our banks does not arise at all and hence there is no need or scope of Bailin. Hence the entire FRDI Bill is misplaced in Indian context and wrongly timed. For India, FRDI Act is unwarranted. Government should reconsider and defer the whole Bill and assure the people of India that their money in banks is totally safe and guaranteed by the government. They must take tough measures to recover the bad loans and make our banks more viable and vibrant.
It is an irony that our government is pushing our banks towards privatization, thus increase the risks and then talk of Bail-in on liquidation.
Rather, government should bring all banks under public sector. Government should ensure recovery of bad loans and strengthen our public sector banks and extend total guarantee for people’s deposits.
It is strange that the government talks of Sabka Vikas and prosperity for the people which is possible only if banks give more and more loans to all needy sections of the economy and people. For this, banks need resources and deposits of the people are the main resources of the banks. But the government is bringing FRDI Bill with bail-in clause and creating panic amongst the people which will drive them away from banks and make the banks unviable.
AIBEA has already appeared before the Joint Parliamentary Committee and urged upon them to reject the Bill. All India Bank Employees Association is contemplating a strike action against this unwarranted FRDI Bill, if the government proceeds further. (IPA)

Thursday, 4 January, 2018