Will the FRDI Bill be DeMo 2.0?

The Financial Resolution and Deposit Insurance Bill (FRDI) being designed to fence financial institutions from collapse has stirred panic and rumour-mongering reminiscent of demonetisation. Essentially, there are two flaws to the proposed bill. First, the insured amount remains at `1 lakh which was provisioned for since 1993, as against $250,000 in the US. Second, the Resolution Corporation after assessing if the ‘critical risk category’ of an institution has been breached would be empowered to invoke Clause 52 to convert amounts in excess of `1 lakh into long-term bonds or equity.

As only two per cent of Indian households invest in equity as an asset class, allowing for this arbitrary provision without consent is a violation of contract. Because 70 per cent of Indian investors park savings in fixed assets with PSU banks despite low interest rates with an implicit trust that the sovereign would act as a responsible fiduciary to their interests.

PSU banks burdened with `9 trillion bad loans of the `105 lakh crores worth of deposits under their management, is attributed to inadequate due diligence and reckless lending during the high-growth years of the UPA II. Subsequently, negative developments in the telecom and coal sectors following graft charges left many industries over-leveraged. The ‘Too Big to Fail’ concept post the 2008 global financial crisis apprehended that large financial institutions pose asymmetrical risks that can have a contagion effect on the economy if not bailed out by the government. 

However, citizen savings in banks provide the much needed low-cost capital to fund government, retail loans and industry, but the depositor has no control on either forward lending, nor when loans turn into non-performing assets. NPAs occur due to cost-overruns of projects, policy-paralysis of governments, or collusive corporate-banker nexus. As an example, the 17 banks which lent to Vijay Mallya’s Kingfisher Airlines were slack in their loan appraisals and failed to monitor loans when the aviation industry was hit by a downturn, allowing for wilful defaults.

Though bail-outs are not the brainchild of the NDA, they were stipulated by the Financial Stability Forum of the G20 to which India is a signatory, half the member nations have yet to include the bail-in provision. Such a bail-in saw depositors lose 47.5 per cent of their deposits in Cyprus.
Though GOI is well intentioned in instituting the insolvency and bankruptcy code, as also recapitalising `2 lakh crores into state-run banks, social media messaging like “I am always worried about that ghostly call... mitron... aaj se aap ka deposit....” raises alarm if not addressed, and can lead to household savings exiting to unproductive avenues.

While the government’s intent is to protect tax-payers to fund bailouts, the depositor like the tax-payer is a passive victim. The crusade against black money forced millions to disclose their meagre “kitchen savings” which landed in banks, based on trust in the regulatory systems of banks, a stable government, and a booming stock market.

Persisting with recovery of NPAs from wilful defaulters, maintaining stringent controls over loan disbursements and passing a bill loaded in favour of depositors is a consensual way forward. Because if trust is not ‘absolute’, there are perilous consequences of a draconian law which could someday be invoked by a rogue regime.
gdalmia73@gmail.com

Social commentator and author of national  bestseller Diary of a Lutyens’ Princess