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A Dangerous Bill on Banks: Where Depositors Are Made to Pay For Corporate Defaulters -Prabhat Patnaik
-TheCitizen.in

FRDI BIll will do irreparable damage to yet another institution of Indian economy

NEW DELHI: The BJP government, it appears, cannot remain content without inflicting irreparable damage on the institutions of the Indian economy. Its latest move in this direction is the Financial Resolution and Deposit Insurance (FRDI) Bill which was introduced in Parliament on the last day of the winter session and is now with a Select Committee.

What this Bill proposes is the setting up of a Resolution Corporation, consisting largely of central government officials, which, in the case of stressed banks whose condition is considered “critical”, will use creditors’ money, including that of depositors, to overcome the default by borrowers.

Until now it was the budget of the central government, the owner of the nationalized banks, which was supposed to be used for their “bail out”; now, however, the idea is not to have a “bail out” but a “bail in”, i.e. not to have central government help for supporting distressed financial institutions but creditors’ funds, including those of depositors.

Currently all deposits up to Rs.1 lakh are insured by banks themselves, so that there is no risk of loss to these depositors in the event of a bank failure.

The Deposit Insurance and Credit Guarantee Corporation, a subsidiary of the Reserve Bank of India, which covers such depositors is proposed henceforth to be wound up; and no other institution has been suggested in its place in the Bill.

More importantly, however, it is not just the existence of this Corporation that instilled confidence among depositors about the safety of their deposits with the nationalized banks; it was the fact that the banks were government-owned, the conviction that the government would never let these banks fail.

It is this confidence which made millions of depositors, especially pensioners and senior citizens, hold their wealth in the form of bank deposits, even though such deposits offered comparatively lower rates of return than shares, mutual funds and many other assets. This confidence will now disappear.

In the old days people used to hold cash in boxes, since they had little confidence in the banking system which was controlled in their perception by a set of unknown private operators with no scruples.

Bank nationalization changed all that, and an enormous amount of deposits got mobilized across the country because of the confidence it generated among people that these banks, being owned by the government, would never let depositors down, that depositors’ money was totally safe in these banks.

While this confidence is now set to be undermined, demonetization, with Modi’s explicit promise that the experiment will be repeated from time to time, has served ironically to undermine people’s confidence in currency as well at the same time. (Though demonetization does not necessarily involve an actual monetary loss, it means standing in long queues and going through a lot of hassles, even if we ignore the inconvenience it causes by the temporary relinquishing of purchasing power).

Hence money in both its forms, currency and bank deposits, is now no longer going to be considered a safe asset to hold. Since the FRDI Bill also covers State-owned insurance and other financial companies, their liabilities too, like bank deposits, would lose their attractiveness for numerous small wealth-holders.

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