The FRDI Bill and its Impact on Deposits

Banking Bill in India

Banks are a proxy for the country’s $2.3 trillion economy, yet India doesn’t have a mechanism to deal with the failure of a financial institution. The global best practice suggests that the country should have one and the Financial Resolution and Deposit Insurance (FDRI) Bill, 2017 proposes to fill this void.

However, there is widespread concern about the bail-in clause in the resolution methods of FRDI Bill. The clause means, in case a bank deteriorates, deposits over and above the insured Rs 1 lakh could be converted into securities such as shares in the bank.

In essence, the FRDI bill in current form is almost equivalent to the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act under which uninsured deposits beyond Rs 1 lakh of a bank are treated on par with unsecured creditors and paid after preferential dues are cleared.

The Bill provides safeguards in the form of options for depositors to give consent to bail-in provisions. However, the problem is, unless legally mandated most banks will not give the depositor that option.

The moot point is why the hard earned money of depositors and pensioners be offered to banks for free without any quid pro quo. The bail-in provision is similar to what European countries like Cyprus adopted. In 2013, Cyprus made good of it when deposits above €100 000 were classified as “disposable”as the number of accounts above €100 000 mostly belonged to the affluent class. In contrast, such a ‘bail in’ clause may be avoided in the Indian scenario where the average incomes of depositors are modest. Cyprus’s per capita income is 14 times higher than India’s.

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