The unsustainable high NPAs [non-performing assets] of banks – most of these with public sector banks [PSBs] – have caused massive erosion in their capital. This in turn, has forced the government to come out with massive infusion of fresh capital to bail them out. But, this has led to serious concern about the impact it will have on the center’s balance sheet and its fiscal consolidation efforts.
No wonder, international financing agencies such as International Monetary Fund [IMF] and World Bank as also rating agencies have flagged ballooning NPAs as major area that could mar the prospects of India embarking on a high growth trajectory [notwithstanding fundamental reforms such as demonetization and GST implemented by Modi – government].
The government has taken a number of measures to deal with NPAs including taking defaulters to the National Company Law Tribunal [NCLT] under Insolvency and Bankruptcy Code [IBC]. How much of bad loans will be recovered, one can only wait and see. Meanwhile, it is thinking through alternative mechanisms that would help resolving the bad loan at the level of bank itself.
Pursuant to this, in August 2017, the government introduced in the Lok Sabha the Financial Resolution and Deposit Insurance Bill [FRDI], 2017 with an objective to limit the fallout of the failure of financial institution [FI] like banks, insurance companies, non-banking financial companies [NBFCs], pension funds and stock exchanges. The bill was referred to a joint parliamentary committee [JPC]. On receipt of the committee’s recommendations, it is likely to be taken up for consideration in Parliament only in the monsoon session.
One of the resolution tools proposed is the provision for a ‘bail-in’ clause in the event of a FI failing, wherein the depositors will have to bear a part of the cost of the resolution by a corresponding reduction in their claims. This has led to widespread consternation among millions of persons who have their deposits in banks and other FIs and strongly feel that their money would no longer be safe following passage of the bill.
The resentment refuses to die down despite a clarification issued by secretary, department of economic affairs, S C Garg that the provision will only be used sparingly and that “the PSBs will effectively not be subject to bail-in provisions”.
Within the government also, there is opposition. For instance, the labor ministry which manages funds of about 30 million employees under the ESI [Employees’ State Insurance] scheme and has fixed deposit of Rs 46,000 crore in PSBs has raised an alarm bell. The ministry has argued that the corpus which is built out of contribution to the provident fund account [4.75% of the salary by the employer and 1.75% by the employee] is essentially meant to provide medical facilities in situations of illness, disability and death, cannot be put to risk under any circumstances. With the bail-in clause, the Resolution Corporation [RC] can tap these funds too!
In the event of a failing bank, on what basis, the government can argue that depositors will have to bear a part of the cost of the resolution? The only way it can claim access to their funds is by presuming the deposits to be equity capital which by definition is risk capital. For example, if a person has invested in equity shares of a company, in a situation of the latter failing, the former has no right to claim his/her money back.
But, this logic cannot be extended to deposit. A person puts his money in the bank – be it as savings or time deposit – in full faith that this is safe and that he can withdraw the full amount [with interest accrued as applicable]. The bank is obligated to meet this liability to the depositor in full irrespective the circumstances facing it at any point of time. By any stretch of imagination, it cannot be treated as equity.
An unnecessary distinction is sought to be drawn between a portion of the deposit that is insured and the other which is un-insured. The government has further clarified that deposits up to Rs 100,000/- will continue to be insured under the bill. On the other hand, for uninsured deposit i.e. beyond Rs 100,000/- as against existing law wherein such deposits are treated at par with unsecured creditors and paid only after preferential dues [including government dues] are cleared, under the FRDI Bill, the claims of uninsured depositors in the case of liquidation of a bank will be higher than those of the unsecured creditors and government dues.
The RC will also have to ensure that all creditors, including uninsured depositors, get at least such value, which they would have received in the event of liquidation of a bank. In case, depositors get less then, the RC would make up for the shortfall.
Giving preference to depositors [albeit uninsured] over unsecured creditors and government dues or assuring an amount not less than what they get under liquidation does not make the situation any better as the former are being made to accept some cut – only the amount of cut might vary depending on their ranking in firing line. It tantamount to saying ‘you may be saved from 20 years jail term, but will necessarily be handed out 10 years or 5 years’. Other proclaimed safeguards like bail-in instrument will be subject to government scrutiny and oversight of Parliament and require prior consent of the depositor are mere platitudes offering no comfort whatsoever.
It needs to be understood in no ambiguous terms that depositor’s money in the bank is strictly in the nature of a loan given in good faith and the latter has no right to fiddle with it in any manner whatsoever. The bank cannot unilaterally convert it into equity capital and thereafter appropriate for the purpose of saving itself from adversities. The bail-in provision in the FRDI bill seeks to do precisely that. This is not only bad in law but will have catastrophic consequences.
The government should drop this abhorrent idea; instead, it needs to tighten regulatory oversight and step up surveillance to ensure that NPAs don’t happen [or kept to bare minimum] thereby obviating the need for capital infusion – be it from the government or appropriation of depositors’ funds.