FRDI: Bailing-in the unbailable!

The Modi government at the Centre seems to be on a suicidal path. After making the masses suffer the ignominy of standing in serpentine cues for hours on end to withdraw their own money from banks by demonetising Rs 500 and Rs 1,000 currency notes in November 2016, the Modi government is now contemplating usurping the bank deposits of crores of Indian citizens to bail out banks on the verge of bankruptcy. This ill-conceived and blatantly anti-depositors move comes in the form of the controversial Financial Resolution and Deposit Insurance Bill, 2017, (FRDI Bill).

The FRDI Bill seeks to appropriate the hard-earned honest taxpayers deposits in banks through the bail-in provision. According to this provision, abank on the verge of bankruptcy will be allowed to convert deposits above a certain threshold into equity in order to recapitalise it and thereby save it from going bankrupt. According to the proposed legislation, the bank need not take the depositors’ permission to convert the deposits into equity. There cannot be a more draconian provision than such a bail-in provision.

First, which depositor in his senses would voluntarily want to put his hard-earned money on line by investing in equity shares of a failing bank? So, why does the government want to force the bank depositors to buy equity shares of such non-viable entities?

Second, such a bail-in provision would provide a breeding ground for irresponsible (if not dishonest) bank managements and unscrupulous politicians to milk the banking system to serve their own interests. After all, there cannot be no better provision for them if the deposits of customers can be converted into equity shares to save their failing banks. The bail-in provision will, therefore, absolve the bank managements of their accountability and responsibility for having brought their banks to such a sorry state of affairs due to financial mismanagement, crony capitalism, lending at the behest of politicians or even resorting to downright dishonesty.

Lastly, the deposit insurance scheme protect deposits only up to Rs 1 lakh per depositor. The insurance limit of Rs 1 lakh per depositor was set on May 1, 1993, and it has not been revised since then. Considering the inflation and the increase in cost of living during the last 24 years, the limit needs to be raised to at least Rs 10 lakh per depositor. The FRDI Bill, if at all it is to be made into a law, needs to raise this limit first so as to protect the deposits of lower and middle class depositors from being usurped by unscrupulous bank managements and dubious politicians-turned-bankers. 

The need, however, is not the FRDI Bill, but to fix the problem at its roots by making both public and private sector bank managements more accountable, preventing crony banking-corporate nexus in the banking system and insulating the banking sector from unscrupulous politicians. 

If the Modi government does not want to incur the wrath of crores of bank depositors in the 2019 elections, it would do well to scrap the bail-in provision in the FRDI Bill.