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Deposit Cash, Receive Shares Scare, too real to wish away

Deposit Cash, Receive Shares Scare, too real to wish away

While all eyes were on the Gujarat elections, an online petition, headlined “do not use innocent depositors’ money to bail in mismanaged banks #NoBailIn” – raised on change.org got more than 40,000 signatures overnight. At the time of writing, more than 1.3 lakh people had already signed the petition. So much so that finance minister Arun Jaitley had to issue a statement saying that public money was safe.

But why Mumbai-based Shilpa Shree had to go online and raise a petition, which purportedly will be forwarded to the finance minister and a few more people, who happen to be the decision-makers in this case. When we all were dealing with the venom spilled out by the opposing parties in Gujarat, how could a simple petition get so much attention, at least in the social media, if not in the print or electronic media? The petitioner questioned a bill that seemed to regulate the distressed financial sector.

The newly drafted financial resolution and deposit insurance Bill (FRDI), allegedly meant to bail-out the banks from bankruptcy has actually become a nightmare for many, who have understood its larger implications. The   Bill came up for discussion during the monsoon session but was referred to a joint parliamentary committee comprising members from both Houses of Parliament. At that time too, the bank unions had raised its voice against it and a nation-wide strike was called.

In the early 1990s, when the banking law was amended to reduce the government’s stake from 100 per cent to 51 per cent, there were all-round protests, be it from the bankers or trade unions. But even those strikes and protests could not match the kind of hysteria the Bill has created this time. Now, what is this Bill all about? And what has led people to protest against it?

The FRDI Bill deals with the banks, insurance companies, financial institutions etc. which are on the verge of becoming insolvent. Something similar to what the insolvency and bankruptcy code provides for -- taking action against defaulting companies or corporates, which took money from banks but are not in a position to pay. It covers a large number of financial service providers, which deal with the public in one way or the other. Be it a bank accepting deposits or an insurance company or a depository providing demat services, all are covered under this Bill.

The Bill envisages establishing a corporation, which shall have a distinct legal entity in the eyes of law and shall be capable of suing and be sued. The corporation, to be called as the resolution corporation, shall have the powers of providing deposit insurance, inspecting the premises of a service provider, taking steps for resolving the financial crisis and also acting as a liquidator. In other words, in case a service provider goes bankrupt or insolvent, the corporation shall decide the ratio and the manner in which the creditors (including depositors in this case) shall be paid.

The Bill intends to replace the existing deposit insurance and credit guarantee corporation (DICGC), which provided insurance cover of up to Rs. 1 lakh to the depositors. It will monitor the financial companies closely, classify them and define their risk profiles and take necessary steps to resolve the financial strain. This may include taking over a company or a bank or financial institution or merging it with a healthier institution.

Considering the size, complexity, nature and volume of transactions, a financial service provider shall be categorised as Systematic Important financial institution. This institution shall certainly get a priority in resolution and restoration process. Now, you may all think, this seems to be the normal procedure and why should someone raise voice over what may be done to deal with one of the most serious financial crises.

The reason why this Bill has come under scanner is the way, the corporation will have the power to deal with public money. Till now, what we have seen is that whenever a public financial institution or a bank goes insolvent or has a huge pile of non-performing assets (NPAs), to the extent that it erodes their capital, the government comes into the picture and pumps in capital. The process is called “bail-out”. Similar to what the government did recently when it made an announcement of pumping in Rs. 2.11 lakh crore for improving the health of public financial institutions.

It is no news that the banking sector is not in the pink of its health. Almost every quarter, we hear the news that such and such bank is sitting on a huge pile of NPAs. It is a common sight to see the investment gurus pleading on business channels to invest only after studying the financial health of an organisation. The Bill has a special “bail-in” instead of “bail-out” provision, to lift the financial service provider out of crisis.

Now what’s the difference? Yes, it is actually opposite of what we have normally seen. In a scenario of a bank going insolvent, the government shall not announce any bail-out program but the bank will be assisted through a bail-in option that will authorise the corporation concerned to convert your deposits into equity shares or preference shares, without seeking your consent. In other words, whatever money the bank had will be used to pump in capital!

Not only this, the money that a bank owes to you may be reduced as well. Simply put, if you hold a deposit of say Rs. 10 lakh in a bank, the Corporation may decide to give you back only Rs. 1 lakh to the extent it is covered under deposit insurance. The mode of giving back may also be changed. You may not get the money into your account. 

Instead, a share certificate or any other instrument may be handed over to you, without asking you whether you are even interested in the scheme. Now the question is, who would be interested to invest in a bank or a service provider, which may not be healthy or has gone bust, ignoring what the investment guru has been propagating for years? A person like you or me may also not be able to understand how the securities markets operate. Worse, the new Bill has also not specified to what extent the deposits would be insured.

The Bill that is touted to be a landmark reform in the financial sector has been drafted in the wake of the 2008 financial crisis. A similar law has been passed by many countries, including the US, where the government had to bail-out many failed banks with the tax-payer’s money. Considering the crisis, the financial stability board (GSB) was established in 2009, where the G-20 members are signatories. India, being a signatory, brought in this legislation.

Going by the global example, Cyprus is one country, where people lost 50 per cent of their deposits after a bail-in option was introduced. This reminds us of an era when 1600 private banks were closed down, between 1913 and 1960 and people lad lost their money. Are we heading towards a similar era? Seems so going by what is being said by the government officials.

Piyush Goyal, railway minister, recently spoke that the government will not leave any stone unturned to clean the banking sector. “We are asking banks to show the deviation between their balance-sheet, the audited balance-sheet and the AQR numbers, which has put pressure on the banks to show the correct picture and not indulge in ever-greening.” He also said, “The NPAs are a legacy issue that are being recognised only recently as per Reserve Bank of India Governor Urjit Patel.” Speaking at an event, he said, “In March 2014, 36 per cent of stressed assets were identified as NPAs; in June 2017, this jumped to 82 per cent.” This makes the situation all the more alarming.

Whatever may be the case, legacy issue, wrong methods of giving loans or credit restructuring, the question is why the general public should suffer, if some of the leading corporate firms did not pay money? We are already doing what we are meant to by paying our taxes on time.

While people like Vijay Mallaya can easily escape the law of the land, why should me or you pay for the luxuries that they enjoy? And why should we have sleepless nights, when some MP sitting in an air-conditioned room can command the banker and ask him to release the money? The problem is not the over-rated balance sheets but the way public sector banks function. If the government wants to take some action, it should rectify its system and book those who have huge empires but are not willing to pay their dues to the banks.

Luckily, the joint parliamentary committee could not submit its report and sought extension of deadline till the last date of the budget session. The request has been acceded to by the Lok Sabha speaker. However, this respite is similar to how a pigeon feels when it sees a cat and instead of flying, it closes its eyes. For a month or so, we all can have a sigh of relief. But keep your eyes and senses open, till the time this Bill is passed. Raise your voice till the government changes its stand. That is all we can do for the time being.

(The writer, a company secretary, is director, communication, Deepalaya and can be reached at jassi.rai@gmail.com )

(Published on 26th December 2017, Volume XXIX, Issue 52)