Issue :   
January 2018 Edition of Power Politics is updated.         January 2018 Edition of Power Politics is updated.
Issue:Jan' 2018


A matter of depositors' confidence!


The Bharatiya Janata Party's decisive victory in Himachal Pradesh and the diluted victory in Gujarat Assembly polls, the latter being the Prime Minister Narendra Modi's pocket borough for two decades, meant that the NDA government headed by it might be risk-averse to court unpopular or manifestly anti-popular reforms that might rock the ship of governance.
With three major States Karnataka, Madhya Pradesh and Rajasthan going to the polls before long and ahead of the 2019 General Elections and the Congress Party gathering its defeatist wits by the much-delayed coronation of Rahul Gandhi, the heir apparent to his great grand-father Pandit Nehru, the ruling dispensation is in no mood or mode to gamble its fortunes by show of reckless reformist instincts. Prime Minister Modi did say in the heat of the Gujarat polls that he would pay a heavy political price if he is constrained to continue his economic reform policies. But, sanity and sobriety suggest to him that it would be imprudent to earn the enmity of the swathe of the middle-class people who plumped for his promise to rid the system of its reprehensible ills by rooting for a major overhaul of the economy.
How else could one account for Lok Sabha Speaker Sumitra Mahajan's information to the House on the opening day of the winter session that the extension of time sought by the Joint Panel on the Financial Resolution and Deposit Insurance(FRDI) Bill headed by the BJP Rajya Sabha member Bhupendar Yadav is "up to the last day of the Budget Session, 2018". Incidentally, it needs to be noted that the Chairman of the House Panel on the FRDI Bill Yadav is the BJP General Secretary-in-charge of Gujarat.
The extension of the time given to the FRDI Committee meant that its recommendations would be made available only some time in late April or early May when the second leg of the budget session comes to a close after the passage of the 2018-19 Union Budget.
The delay intended may not be by design but by default because some of the provisions in the proposed FRDI Bill, presented to the Lok Sabha on the last day of the monsoon session in August 2017, provoked the ire of depositors in the bank accounts of small savings and fixed deposits (FD).
Be that as it may it would be instructive to take a bird's eye-view of the Bill that is primarily designed to provide "a comprehensive resolution framework for specified financial sector entities" including commercial banks which got over-exposed to imprudent lending and landed themselves with a whopping weight of non-performing assets (NPAs).
In banking parlance, assets meant that the loans extend to productive sectors to carry on their operational expenses including investment and thereby earn a reasonable rate of returns for the banks! It is altogether another unedifying story that the borrowers always complain about the high cost of money from the financial intermediaries that impair their operations and render the country a high cost economy.
That is why there has always been howls of snarls and resentment whenever the monetary policy of the central bank does not reduce the prime lending rates with which ordinary borrowers access the funds of banks.
Interestingly, the information made available by Minister of State for Finance Shiv Pratap Shukla to a written query in the Lok Sabha on December 15 shows that gross NPAs of scheduled commercial banks were 8,50, 178 crore of rupees as on end- September 2017. As per RBI data, NPAs of 21 private sector banks as on end-March 2017 rose to Rs 91,915 crore from Rs 33,690 crore as on end- March 2015 which is an increase of 173 per cent.
Gross NPAs of public sector banks rose by 145 per cent over the same span. A point to note is that the NDA cannot hide behind the blame that NPAs were a legacy issue of the UPA as portrayed by no less a person than the Prime Minister and his minister Piyush Goyal in the run-up to the Gujarat assembly polls as the accelerated pace of 145 per cent pile-up of NPAs of PSBs supervened under the NDA charge! The FRDI Bill, among others, envisages the setting up of a Resolution Corporation (RC), which is designed to provide for the resolution of certain categories of financial services providers in distress, deposit insurance to the depositors of an insured service provider up to a specified limit; and protection of public funds, for ensuring the stability and resilience of the financial system".
It is also made clear that setting up of the RC is predicated on the passing of FRDI Bill by the Parliament. The proposed RC would monitor financial firms such as banks, insurance companies, stock exchanges and payment systems to detect early signals of impairment rather than letting it get festered to the point where there is a perilous risks of contagion to the entire financial landscape.
What needs to be grasped is that financial entities such as banks and insurance firms take deposits and garner premiums from a large section of retail investors including retired people who put their nest-egg lifesavings in banks' FDs. These are the categories of people who could not band themselves as creditors.

When banks launch the bankruptcy process against the borrowers to whom they had lent out of the deposit money of millions of retail savers the latter are the worst affected since the defaulting borrowers plead insolvency and the bank had to take what is euphemistically termed "hair-cuts"! Thus in initiating bankruptcy, depositors would be the worst hit in the case of a failure of a bank in clinching the bankruptcy process by paying through its nose for a run-down asset of the borrower!

This is in spite of the extant insurance ceiling of one lakh of rupees only, even if one holds multiple accounts in a variety of forms including small savings and FDs and the rest of the depositor's money could be used for bailing in the banks on the brink of a collapse because of its overwhelming burden of the NPAs. Official information show that savings and deposits parked with banks are now well over 100 lakh crore of rupees.

What rattles a raft of small depositors is a provision in the proposed FRDI bill empowering the Resolution Corporation to "bail-in" a financial entity such as banks! A 'bail-in' entails salvaging a bank on the brink of failure by making its creditors and depositors take a loss on their holdings! It is the diametric opposite of a "bail-out" which entails the rescue of a financial body (bank) by external agencies, typically governments, using taxpayers' money.

Thus instead of government going to the rescue operation of a failing bank or any other financial entity by infusing capital, depositors' funds parked in banks at insubstantial returns to them are being proposed to be availed of for this purpose.
There is not much difference in both the approaches because in the earlier one of government taking the tab of a failing bank only taxpayers' money is utilized and in the latter proposed clause a specific constituency of deposit holders in banks would be flailed for the wanton ills of the banks. In essence, the cost of rescue is socialized even when in good times the profits earned by these financial firms are cornered by a few! The proposed clause in the FRDI bill is the fallout of the path laid out by many Western governments after the financial meltdown of 2008 in a bid to severely circumscribe the use of taxpayers' money to bail out banks in future. In November 2011, the leaders of the G-20 where India is also a member assented to a key feature of an effective and efficacious financial resolution regime for financial entities as an international standard with bailin as the principal clause.
Following this development, as a responsible initial member of G-20 India has had to take action and the Financial Sector Legislative Reforms Commission in 2012-13 did concede that eliminating all failures of financial institutions is "neither feasible nor desirable" as such failure "is an integral part of the regenerative processes of the market economies".
In 2014, the Financial Stability and Development Council-mandated Working Group headed by a former Finance Secretary Arvind Mayaram and RBI Deputy Governor Anand Sinha which suggested the setting up of a resolution regime for tackling the failure of weak banks and financial entities in which the losses would be absorbed by shareholders and unsecured creditors (read depositors subject to a paltry insurance cover capped at one lakh of rupees).
It is no doubt a laudable initiative to insulate the authorities from funding the costly failure by dipping into depositors' funds parked in banks but in a country, unlike the developed western nations, where available avenues for safe deposits of one's hard-earned money are next to nil, it would be foolhardy to play fast and loose with trust reposed in banks by the public by any hint of such a proposal as the one called bail-in.

Mere verbal assurance from the Prime Minister and the Finance Minister that the depositors money would be protected would not do unless the Joint Panel composed of members of both the Houses with Opposition members studiously applying their minds submitted a report that would put at rest all the apprehensions of legions of depositors in this regard.
This would definitely go a long way to infuse confidence in depositors so that the household sector savings that remain the linchpin of the economy would not be withdrawn by the simmering public depositors seething with fret and fury, policy analysts wryly say.