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The Centre has done well to heed the public’s concerns and drop the controversial Financial Resolution and Deposit Insurance (FRDI) Bill. The infamous ‘Clause 52’ of the FRDI Bill, which proposed to empower the Resolution Corporation overseeing bank defaults to invoke bail-in provisions cancelling any of the bank’s liabilities, had rattled depositors. In India, where over 70 per cent of the depositors’ money is parked in state-owned banks, proposing the use of deposits for bail-ins would have shaken public faith in the banking system. At a time when scam-hit PSU banks are reeling under huge losses, such a suggestion only sounded more absurd. That scrapping of the Bill altogether has left a gap in the legal framework for resolution, including liquidation, of financial firms in India, is a matter that the Centre will no doubt have to take up at a later date. But in India, where instances of commercial banks going kaput are very rare, incorporating a bail-in clause, as in other developed countries post the 2008 crisis, will always be unwise. There were a number of banks that failed in India in the pre-Independence era. But the public outcry that followed led to the RBI being granted powers in the early 1960s for consolidation, compulsory amalgamation and liquidation of small banks. Since the reforms in 1993, 13 forced mergers have taken place. Technically, no commercial bank has ‘failed’ in India.

That said, the sharp deterioration of public sector banks’ finances has shaken depositor confidence. The biggest backing that state-owned banks have at all times is the Centre, pumping in money year after year. But, sadly, such tacit support from the Centre has stood in the way of creating a robust deposit insurance system in India. Less than a third of bank deposits in value terms are insured by the Deposit Insurance and Credit Guarantee Corporation of India. The abysmally low ₹1 lakh cover, was last raised in 1993. Canada, Brazil, Indonesia, Switzerland, and France all insure an amount upwards of $70,000 per depositor. In the US, the Federal Deposit Insurance Corporation offers an insurance coverage of $250,000; In India, the deposit insurance currently is a meagre $1,500.

The issue in raising the cover has been the perception of cross-subsidisation in the operation of the deposit insurance system. This is because, so far in India, the beneficiaries of the deposit insurance system have mainly been urban cooperative banks. The RBI would do well to implement the risk-based differential premium system, which was proposed by the panel headed by Jasbir Singh in 2015. With public sector banks perennially in need of capital to carry on operations and the Centre hamstrung by fiscal compulsions, it is imperative to strengthen safety nets to protect depositors’ interest. Above all, governance reforms in PSU banks that have been put on the backburner cannot be ignored any longer, if depositors’ faith in the banking system is to be restored.