Assuring depositors

The extent to which Indians are attached to their bank balances was visible a couple of years ago when a rumour was spread that a leading private bank in India was running out of cash to operate. Within minutes, large numbers lined up in front of the bank’s branches and ATMs across the country to withdraw whatever balance they had.

It took a lot of convincing from the bank management to assure depositors that their money was in safe hands. Considering this background, it is not surprising that depositors across the country have expressed grave concerns about the Financial Resolution and Deposit Insurance Bill (Bill) in general and about the “ bail- in provisions” contained in Section 52 of the Bill in particular.

Section 52 elaborates that the ‘Corporation’ may take an action under this section by a bail-in instrument or a scheme to be made if it is satisfied that it necessary to bail-in a specified bank to absorb the losses incurred or reasonably expected to be incurred by the bank and to provide a measure of capital so as to enable it to carry on business for a reasonable period and maintain market confidence.

The clause that has created all the trouble is 3a) which states that a bail-in provision could mean a provision cancelling a liability owed by a bank, a provision modifying or changing the form of a liability owed by the bank. Since the deposits accepted by banks are their liabilities, there is a fear that in case a bank is in trouble, depositors’ monies could be lost courtesy Section 52 (3)(a).

Depositors can take comfort from the fact that till date, the Reserve Bank of India has not allowed major banks to be bailed in. Nedungadi Bank, Global Trust Bank and Bank of Rajasthan and some cooperative banks were all bailed out through a merger with other banks.

As on date, depositors are assured of a minimum of ₹1 lakh through an insurance corporation. The amount of ₹1 lakh was fixed ages ago and a revision is overdue. A major shortcoming of the new Bill is that it is silent on the amount that depositors would get if there is a bail-in.

The bail-in provision can also be legally challenged if the need for a bail-in has occurred due to the Government’s largesse in waiving off loans such as agricultural loans. The depositor will ask why he should take a hair cut on his hard-earned money just because of the Government’s magnanimity.

The question that arises is — when the present system is not broke, why attempt to fix it? An amendment to the Banking Regulation Act to incorporate insolvency proceedings should be good enough since the Government and the RBI deal with possible insolvencies on a case-to-case basis.

The Bill raises an uneasy question as to whether the Government is attempting to dilute the powers of the RBI.

Although the Bill does refer to the RBI as a regulator, a separate Corporation could possibly override the RBI if any such situation should arise.

Since no one knows Indian banks better than the RBI, a separate Corporation to deal with insolvent banks would only add to the statistics of number of institutions. Instead of passing a new Bill, the Government should think of strengthening the present Acts to achieve the same objective.

The writer is a chartered accountant