A matter of depositors'
confidence!
G.Srinivasan
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.
