Money & Banking

Failing banks: Govt looking at refund mechanism to protect depositors

New Delhi | Updated on January 09, 2018 Published on December 31, 2017

Bonds to make up for shortfall being considered

To ensure that a depositor does not lose his/her money during a resolution or insolvency process of any failing bank, the government was considering a refund mechanism.

The newly proposed resolution and insolvency framework for financial entities envisages the framing of a new scheme for refund of depositors’ monies in troubled banks, while providing higher protection to them, sources in the know said.

The refund scheme would, among other things, provide for issuance of government bonds to depositors towards the shortfall, if any, on the amounts to be returned to depositors of troubled banks, an official said.

“What cannot be returned by way of cash immediately will be settled by way of bonds. The mechanism in the scheme will provide for return of monies part in cash and part in bonds,” the official said.

The latest issue haunting Finance Minister Arun Jaitley and his team is the security of depositors’ money under the proposed Financial Resolution and Deposit Insurance Bill.

While Jaitley and others in the government have been assuring the safety of deposits, the Opposition has been raising questions about it.

While the Bill has been referred to a Joint Committee of Parliament, which has been given time till the last date of Budget Session (likely to begin February 1) to submit its report, the government has been looking at options to address the contentious issue.

The mechanism, according to sources, will give better protection for depositors as the current regime provides for only ₹1 lakh insurance on deposits. Deposits over ₹1 lakh have no protection and are with banks at the depositors’ own risk, a banking industry observer said.

In the past, the Reserve Bank of India, had through the instrumentality of forced mergers come to the rescue of depositors of failed banks or troubled banks. The RBI may not have significant role in future if the new resolution and insolvency framework for financial entities were to get enacted by Parliament.

The Centre has through the Financial Resolution and Deposit Insurance Bill sought to provide a separate resolution and insolvency framework for financial entities such as banks and insurance companies.

This Bill provides for the creation of a Financial Resolution Corporation, which is expected to be empowered to from time to time and spell out the ceiling for depositors’ monies that would get protected. It is also likely to specify the manner of protection for depositors’ monies.

The Centre’s move to have a separate insolvency framework for financial entities is a fallout of the recommendations of Justice Srikrishna headed financial sectors legislative reforms commission (FSLRC).

Already, the FRDI Bill and the controversy over possible use of depositors’ money in ‘bail-in’ has unnerved depositors and shaken their trust in banks.

Nearly 5-10 per cent of the deposits in the banking system have been withdrawn or moved to other assets like mutual funds in the last few months, banking industry observers said.

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Published on December 31, 2017
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