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Proposed Amendment Could wipe out bank deposits of ordinary Indians

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The Financial Reconstruction and Deposit Insurance (FRDI) Bill 2017 has included provisions in Sections 52 and 53 for "bail-in", which essentially provides for rescuing financial institutions in distress, mainly on account of excessive NPAs (bad loans), by making creditors and depositors take a loss on their holdings. The only amount of deposit which will be protected is the amount covered by the Deposit Insurance (yet to be specified, but which currently stands at Rs 1.0 lakhs).

Even if the insurance limit remains the same, there is a substantive difference as to when this insurance cover needs to be availed of. Currently, a bank can fail only if the Government of India decides not to bail-out a distressed bank by refusing to infuse additional capital into the bank. This is a very serious decision, and before any Government resorts to this, it will have made every effort to ensure that the bank has explored every avenue and taken every action needed to prevent its failure. With the bail-in provision, the Government and regulator just need to wipe out the liability, either fully or partially, of the bank to its depositors. There is no compulsion in such a system for either the concerned bank, the regulator, or the Government to make best efforts to prevent a distressed bank from resorting to such extreme measures. 

In other words, the tens of thousands of crores that have been lent to big corporates in the country, and which have turned bad, will now be recovered from the ordinary citizen, middle class salary earners and pensioners who have been slowly accumulating their capital through bank deposits. This provision is against the principles of natural justice, and is tantamount to rewarding the reckless or inefficient corporate citizen at the expense of hundreds of millions of innocent citizens. The vast majority of Indians regard bank deposits, particularly in the government-owned banks, as the safest mode of investment, and this move seeks to strike at the very root of this belief.

Worse, it will have the following adverse effects:

1. At a time when the government is trying to encourage minimal use of cash, people will have no option but to go back to investing in gold. Since sovereign gold bonds are also government instruments, the confidence in the safety of this investment mode will also be suspect.

2. It will adversely affect the government's efforts to encourage banking habits amongst citizens.

3. Banks will have an easy way out - and their efforts to collect the bad loans will become even more relaxed. Similarly, the due diligence conducted while sanctioning such loans will also be slackened. This can pave the way for a very unhealthy corporate-banker nexus  based on mutual benefits at the expense of the ordinary citizen.

4. It will appear the government is favouring the big corporates who defaulted on their loans and penalising the poor citizens instead 

In view of the foregoing, it is essential that the bail-in provisions in the proposed bill be removed.


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