In August 2017 a bill called Financial Resolution & Deposit Insurance( FRDI ) Bill 2017 was introduced by Finance Minister in Lok Sabha. This Bill inter-alia had provision for 'Bail-in' of failing banks.
This Bail-in is opposite of Bail-out. In Bail-out process a failing bank is rescued by government funds whereas in Bail-in process funds are not provided by government instead available funds of creditors & depositors are used for rescue of the failing bank.
A failing bank may utilise customers' deposit partially or fully to wipe out its losses. Failing bank may compensate the customer by issuing shares or bonds payble at a future date or even forfeit the deposit in part or fully subject to approval by a government appointed regulator.
There was hue & cry over the bill & there were varied opinions by several institutions. As a result the bill was withdrawn by Finance Minister in August 2018.
FRDI now becomes FSDR
This FRDI Bill however was not burried but seems to have been nursed & has sprung back as Financial Sector Development & Regulation( Resolution ) Bill 2019. This draft bill has since been circulated to heads of banks, insurance companies & other stake holders but not to public depositors.
As per reports appearing in media it is now more powerful to override several financial regulators. It may include all public sector, private & cooperative banks, public & private insureres and all types of NBFCs which accept public deposits. This Bill lays stress on resolution & not on recovery or restoration of failing financial entity. In other words the Resolution Authority may in its wisdom decide to close or sell off the failing institution & may not oversee the institution revive. This Bill is likely to be introduced soon in Parliament after approval by Cabinet.
Origin of the Bail-in
In 1999 a group of finance ministers & central bank governers of G7 countries formed Financial Stability Forum to promote international financial stability. Not much came out of this Forum though. Later after meltdown of 2008 this Forum was extended to G20 countries(including India). It was converted to Financial Stability Board in 2009.
The Board has membership of 20 countries & six organizations including the World Bank and three Standard-setting bodies including Basel Committee on Banking Supervision.
This Board in 2011 set up a Working Group on Bail-in for examining the legal and operational aspects of contractual and statutory bail-ins...and other issues.' They undertook consultations with market participants and private experts. They have since come out with a 30 page document on various aspects of implementation of bail-in. This document dated 21 June 2018 is available on the website of FSB.
Indian financial landscape
For quite sometime the public as well as private sector banks in India are under pressure of NPAs & are in urgent need of large amount of capital. In coperative sector Punjab & Maharashtra Bank has tanked & depositors are unable to withdraw own funds. Another Bangaluru based cooperative bank namely Sri Guru Raghvendra Sahkara Bank is in trouble. RBI has restricted the withdrawls to ₹ 35000. Another private sector bank Yes Bank is also in trouble. Besides NBFCs like IL&FS and DHFL have added to discomfort in financial market. Further the growth of economy has slackened which may further increase NPAs of banks. Accordingly tax collection may also go down. Reserves of RBI & other cash rich public sector undertakings have already been eaten up by the government.
In such circumstances chances of government providing funds to a failing financial entity are bleak. They may therefore resort to allowing failing bank, insurer or NBFCs to utilise funds of creditors & depositors to wipe out the losses.
Bail-in by default
Once the bill is passed by brute majority in parliament it shall become a law. And if so failing financial institution may be asked to take the route of bail-in which shall surely be detrimental to depositors. So far this FSDR Bill is in draft stage and many things are not clear as yet. However the intention of the government in getting the bill through are there. Apprehensions of the depositors on bail-in are genuine and are there. Very idea of bail-in is obnoxious.
Purpose of saving
We Indians save a lot for marriages, purchase of a house & for post retirement life. By & large favourite mode of saving is fixed deposits of banks. Successive governments have not made any consistent effort to provide post retirement social security by way of old age homes, free hospitlisation or old age pensions. Majority of senior citizens provide for rainy day themselves or are dependent on children. On top of this if in the bail-in process the savings are eaten up partially or fully, most of the seniors & even others may be on roads. Case of a ex-pilot depositing ninety lakhs in PMC Bank & not being able to withdraw more than one lakh is pretty relevant here. It may happen with insurer as well. On maturity the payment of say for example 25-30 lakhs may be withheld by failing insurer & payment postponed partially or fully or forfeited forever.
The Bill though in draft form as yet, is draconian for sure and must be opposed.
References for more info:
1. You may like to read my earlier blog
- Bail-in needs rethink
2. Talk by Thomas Franco former general secy of All India Bank officers Confederation on youtube - 'FSDR Bill will demolish Indian Banking Sector' - https://youtu.be/ISv4otXf7HM
3. Talk by Sucheta Dala on youtube - 'Moneylife Exclusive - FRDI Bill to come back as FSDR Bill: Many questions unanswered' - https://youtu.be/1RRmF2roiWU
This Bail-in is opposite of Bail-out. In Bail-out process a failing bank is rescued by government funds whereas in Bail-in process funds are not provided by government instead available funds of creditors & depositors are used for rescue of the failing bank.
A failing bank may utilise customers' deposit partially or fully to wipe out its losses. Failing bank may compensate the customer by issuing shares or bonds payble at a future date or even forfeit the deposit in part or fully subject to approval by a government appointed regulator.
There was hue & cry over the bill & there were varied opinions by several institutions. As a result the bill was withdrawn by Finance Minister in August 2018.
FRDI now becomes FSDR
This FRDI Bill however was not burried but seems to have been nursed & has sprung back as Financial Sector Development & Regulation( Resolution ) Bill 2019. This draft bill has since been circulated to heads of banks, insurance companies & other stake holders but not to public depositors.
As per reports appearing in media it is now more powerful to override several financial regulators. It may include all public sector, private & cooperative banks, public & private insureres and all types of NBFCs which accept public deposits. This Bill lays stress on resolution & not on recovery or restoration of failing financial entity. In other words the Resolution Authority may in its wisdom decide to close or sell off the failing institution & may not oversee the institution revive. This Bill is likely to be introduced soon in Parliament after approval by Cabinet.
Origin of the Bail-in
In 1999 a group of finance ministers & central bank governers of G7 countries formed Financial Stability Forum to promote international financial stability. Not much came out of this Forum though. Later after meltdown of 2008 this Forum was extended to G20 countries(including India). It was converted to Financial Stability Board in 2009.
The Board has membership of 20 countries & six organizations including the World Bank and three Standard-setting bodies including Basel Committee on Banking Supervision.
This Board in 2011 set up a Working Group on Bail-in for examining the legal and operational aspects of contractual and statutory bail-ins...and other issues.' They undertook consultations with market participants and private experts. They have since come out with a 30 page document on various aspects of implementation of bail-in. This document dated 21 June 2018 is available on the website of FSB.
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| Screen shot of a page of Financial Security Board |
Indian financial landscape
For quite sometime the public as well as private sector banks in India are under pressure of NPAs & are in urgent need of large amount of capital. In coperative sector Punjab & Maharashtra Bank has tanked & depositors are unable to withdraw own funds. Another Bangaluru based cooperative bank namely Sri Guru Raghvendra Sahkara Bank is in trouble. RBI has restricted the withdrawls to ₹ 35000. Another private sector bank Yes Bank is also in trouble. Besides NBFCs like IL&FS and DHFL have added to discomfort in financial market. Further the growth of economy has slackened which may further increase NPAs of banks. Accordingly tax collection may also go down. Reserves of RBI & other cash rich public sector undertakings have already been eaten up by the government.
In such circumstances chances of government providing funds to a failing financial entity are bleak. They may therefore resort to allowing failing bank, insurer or NBFCs to utilise funds of creditors & depositors to wipe out the losses.
Bail-in by default
Once the bill is passed by brute majority in parliament it shall become a law. And if so failing financial institution may be asked to take the route of bail-in which shall surely be detrimental to depositors. So far this FSDR Bill is in draft stage and many things are not clear as yet. However the intention of the government in getting the bill through are there. Apprehensions of the depositors on bail-in are genuine and are there. Very idea of bail-in is obnoxious.
Purpose of saving
We Indians save a lot for marriages, purchase of a house & for post retirement life. By & large favourite mode of saving is fixed deposits of banks. Successive governments have not made any consistent effort to provide post retirement social security by way of old age homes, free hospitlisation or old age pensions. Majority of senior citizens provide for rainy day themselves or are dependent on children. On top of this if in the bail-in process the savings are eaten up partially or fully, most of the seniors & even others may be on roads. Case of a ex-pilot depositing ninety lakhs in PMC Bank & not being able to withdraw more than one lakh is pretty relevant here. It may happen with insurer as well. On maturity the payment of say for example 25-30 lakhs may be withheld by failing insurer & payment postponed partially or fully or forfeited forever.
The Bill though in draft form as yet, is draconian for sure and must be opposed.
References for more info:
1. You may like to read my earlier blog
- Bail-in needs rethink
2. Talk by Thomas Franco former general secy of All India Bank officers Confederation on youtube - 'FSDR Bill will demolish Indian Banking Sector' - https://youtu.be/ISv4otXf7HM
3. Talk by Sucheta Dala on youtube - 'Moneylife Exclusive - FRDI Bill to come back as FSDR Bill: Many questions unanswered' - https://youtu.be/1RRmF2roiWU
8 comments:
Link to this blog -
https://jogharshwardhan.blogspot.com/2020/01/proposed-fsdr-bill-may-hit-depositors.html
Very bad move
Is the bill in line with the 30 page execution document?
Does any of the G-20 nations opted for the same route to tackle these types of financial issue?
@ राजेश ढांडा yes guiding principles are same. Many Latin countries are in process of adopting this. Basic difference is that there are no public sector banks / insurers etc and deposit insurance is for higher amounts. It has been tried in Greece & Cypress also where large number of account holders suffered losses. In Chile & Peru depositors lost money but I couldn’t confirm.
We do not have old age support facilities & hence needs to be opposed.
Yes Sunil Agrwal it is not a good move.
Looting the hard earned money saved by middle class for their future need esspecially for medical expenses enacting a law to help corporates& politicians who amass wealth in their binami names. Where our motherland is being taken? ALAS!!
Unkown rightly said. This move must be resisted
We in india live in a different social structure and different financial backup for senior citizens who cannot get government support or who cannot earn as normal citizens do. the system we follow is for such a low revenue out of all savings senior citizens make through their life. If that also plundered, then where to go.SAD..Let the policy makers, make it clear what the senior citizens should do for their living. do they have any idea???
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