08 Dec 2017 12:59 IST

FinMin allays depositors’ fears on bank ‘bail-in’ provision

FRDI Bill protects, and even expands, safeguards for consumers, it claims

Responding to bank depositors’ fears for the safety of their money, the Finance Ministry on Thursday asserted that the proposed resolution framework for financial firms, awaiting Parliament nod, does not take away the “present protections” available to depositors — and, in fact, provides “additional protections”.

“The Financial Resolution and Deposit Insurance Bill 2017 (FRDI Bill) is far more depositor-friendly than many other jurisdictions, which provide for statutory bail-in, where consent of creditors/depositors is not required for bail-in,” an official statement said.

A bail-in is a way to rescue an ailing bank or a financial institution by making its creditors and depositors take a loss on their holdings.

This statement comes in the backdrop of fears that the provisions in the Bill could get extended to bank deposits. Although the Ministry does not see any adverse impact on depositors’ interest, several banking industry experts feel the provisions could create a moral hazard for banks.

The Ministry reasons that the Bill will strengthen the system by adding a comprehensive resolution regime that will help ensure that, in the rare event of failure of a financial service provider, there is a system of quick, orderly and efficient resolution in favour of depositors.

The Bill was introduced in the Lok Sabha on August 10, and is currently before a Joint Committee of Parliament. The panel’s report would be considered by the Cabinet before moving amendments, if any, in Parliament.

The Ministry further said that the Bill does not propose in any way to limit the powers of the government to extend financing and resolution support to banks, including public sector banks. It reiterated that the government’s implicit guarantee for PSBs remains unaffected.

Unions worried

Bank unions had expressed anguish over certain provisions in the Bill, especially those related to “bail-in”. The Bill had suggested that the use of the “bail-in” provision may result in the cancellation of a liability, which could extend to bank deposits, banking industry sources said. They termed this as the source of anxiety for depositors.

The Bill has proposed the setting up of a Resolution Corporation to monitor financial firms, anticipate the risk of their failure, take corrective action and work out a resolution plan. In the case of a bank failure, this proposed corporation will provide deposit insurance up to a limit, which has not been specified. Currently, bank deposits up to ₹1 lakh are insured.

Other options too

The Bill not only provides for ‘bail-in’, but also other options to bring resolution to the financial firms on the brink of failure. These include mergers, transfer of assets and liabilities to another entity, a bridge financial entity or liquidation via the National Company Law Tribunal.

Bail-in effect

RV Verma, former National Housing Bank Chairman, told BusinessLine that the bail-in provision would compromise depositors’ interests, affecting their confidence in the banking system.

“In extreme situations where the government has to adopt a bail-in, it may compromise depositors’ interests; the depositors’ money will likely be also used for a resolution,” he said, adding that in such cases, a more balanced view — a mix of a bail-in or a bailout — may be adopted keeping in view the depositors’ interests.