The proposed Financial Resolution and Deposit Insurance Act (FRDI) is said to be aimed at providing protection to critical financial institutions and small depositors, but some of its clauses are causing concern amongst the members of the public.
Finance minister Arun Jaitley indicated recently the clauses causing alarm may be reviewed to allay worries.
The primary apprehensions arising from the draft legalisation revolves around Clause 52 .
In current version of the draft legislation the clause states that the nature of deposits with a bank can be modified if the bank is possibly under the threat of becoming commercially unviable.
Bail In Provisions in Clause 52 Root Of Alarm
The proposed law has added in a “bail-in” provision in order to protect the institution from failure. It grants legal powers to an authority named the ‘Resolution Corporation’ to invoke the bail-in clause.
This clause is causing concern since if the bail-in clause is invoked, the depositors may be have no choice in how the funds deposited by them is treated.
In an example if a public sector bank with around Rs. 20 lakh rupees in deposits becomes unviable and vulnerable to failure, under the new law it is referred to the Resolution Corporation which now has the authority to convert upto 10percent of all deposits to either equity shares or preference shares of the bank without the say so of the depositors.
This helps the bank to improve its capital holdings without the Centre having to put in funds.
Banks today are currently severely stressed due to NPAs valued at around Rs. 15 lakh crore and are not likely to recover more than 30% of all loans given out to large corporates, the biggest contributors to the NPAs.
In this scenario there are worries that the banks’ depositors may well be called upon to plug in the shortfall.
Change The Clause Provisions To Address Worries
To address the concerns surrounding the legislation, two issues need to be tackled first:
- Lack of proper depositary insurance.
The bill proves a list of exceptions to the bail-in clause which includes deposits covered by deposit insurance. Currently all deposits of Rs. 1 lakh and below are covered under deposit insurance but the FRDI bill which will replace this framework includes no provisions related to deposit insurance. This needs to be addressed forthwith.
- The bail-in clause is must be voluntary in nature instead of the current model where the depositors have no say.
Depositors who are ready to convert their money into shares for the benefit of the bank can be allowed to do so after they agree to it.
