FRDI bill: Please dont Panic!

Warm Greetings from PenguWIN:

                            Couple of weeks back, one of our clients, who is 3 years away from retirement, reached out to me with the question of safety of bank deposits. Subsequently I got calls from atleast half a dozen clients and yesterday morning, one of our key clients, senior citizen, spooked by FRDI (Financial Resolution and Deposit Insurance Bill), called and wanted to move his major share of bank deposits to Mutual Funds (Liquid Funds). To allay the fear of investors, I thought that I can put together a write-up and will try to keep it simple.

However good the social media tools like Twitter, WhatsApp are, they have their own drawbacks. Both Twitter and WhatsApp are tools to disseminate information; problem is its mostly copied content and forwards to “N” number of people, many a time without even reading the content. A major share of the rumours that the bank deposits of investors can be used for rescuing them (Banks) in an event of financial crisis, can be credited to WhatsApp and Twitter.

The objective of the bill is to set up a new organization, Resolution Corporation that will closely monitor banks/financial institutions and help them resolve, in case of crisis situation. The controversial clause in the bill is the “Bail-In” option where the savings of depositors can be leveraged to rescue the bank. The opposition parties, including Congress have vehemently opposed the bill in the current form and unless all controversial clauses are modified/removed, it will not see the light at the end of the day. Most bank depositors are ignorant of the fact that the current system in place, where a bank gets into a financial crisis, will compensate only to the extent of One Lakh through insurance provided by Deposit Insurance and Credit Guarantee Corporation (DICGC) under RBI. For all these years no one was agitating to revise the insurance amount and why now? The depositors who knew about DICGC too never complained as they firmly believed that RBI and Government will intervene and set things right.

In India, a large portion of the bank deposits are held with public sector banks, which are owned by the Government of India. Hence, usage of depositor’s funds in the banks to resolve issues will have huge ramifications. Unlike other developed countries, our proportion of savings in banks is also high. So, in case the bill is passed in the current form (which is hypothetical) Bank runs (depositors trying to withdraw funds at the same time) will be triggered resulting in colossal impact to our economy. The reason for skepticism in this case is because the rumours are spread with the rider “The current PM is very powerful and is capable of imposing anything like Demonetization”.

About 15 years back there used to be a private bank called Global Trust Bank (GTB) which got into a crisis and RBI and Government rescued it by merging it with Oriental Bank of Commerce, without affecting the interest of the depositors. RBIs scheduled commercial banks ( PSU and Private banks – not cooperative banks) have never defaulted and depositors interests have never been compromised. So, there is absolutely no reason to fear that hard earned money of depositors will be utilized to resolve bank issues. If depositors are not convinced and still sceptical, then there are multiple threats to worry about like a world war getting triggered because of nuclear weapons usage of North Korea or India losing its patience against Pakistan’s support for terrorism and decides to go for a full-fledged military solution (war). I don’t think we are obsessed and worried about wars breaking out and same should be the temperament in the case of FRDI and “Bail-in”

<Blog # PenguWIN 1056 – FRDI bill: Please dont Panic!>