No bail-ins, please

The Financial Regulation and Deposit Insurance (FRDI) Bill of 2017, particularly its bail-in clause, stoked fears that depositors could well be made to reap a bitter harvest of bankers’ failings and borrowers’ cupidity. The Bill, was withdrawn in August 2018 ‘for further comprehensive examination and reconsideration’ following disquiet expressed over its bail-in provision in knowledgeable quarters. But the government’s recent clarification that it has not yet taken a call about the reintroduction of the Bill could renew the gnawing fears of the depositors.

To be sure, the government had recently upped the deposits insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) from ₹1 lakh (fixed in 1993 when the insurance scheme was started) to ₹5 lakh following the PMC Bank fiasco of 2019. And to the extent one’s deposit is insured, one need not worry because even if under the bail-in provisions one’s hard-earned deposits are dipped into, the loss would in any case not devolve on the depositor but on the insurer — that is, DICGC. Even after this substantial hike in insurance cover, it leaves big deposits vulnerable. Granted it covers 92 per cent of the accounts, but that covers just 30 per cent of the deposits. Which means 70 per cent of the deposits are large deposits that remain outside the pale of insurance and could be the object of the covetous hands of the FRDI law should it be introduced.

While insurance is not a bad idea, bail-in is obnoxious, so what even if some of the advanced nations in the West have such a law in their statute book? To be sure, the 2017 Bill that was withdrawn in 2018 promoted the depositors ahead of unsecured creditors in liquidation and to that extent tried to assuage their feelings, but depositors should remain impervious to any threat of evaporation of their money. And this assurance can come only from 100 per cent deposit insurance as against the extant half-way house where only ₹5 lakh per branch of an account-holder is insured that tantalises him to open multiple accounts in such a manner that his exposure to one single bank is not more than ₹5 lakh. In fact, the insurance premium can be equitably shared between the government and the depositors. Large depositors won’t be averse to the idea of partially footing the insurance bill.

The incumbent CII President Uday Kotak, who is the founder of the partially eponymous Kotak Mahindra Bank, warmed the cockles of his depositors by saying recently on assumption of office of the President of the Chamber that protecting depositors’ interests should be paramount both for bankers and the government. Depositors are at the core of the banking edifice with bankers just acting as an intermediary, lending the deposits for industrial and other uses. The small interest earned by depositors is a very small cost for banks given the fact that the ‘spread’ (difference between the average lending rate and the average deposit rate) is perhaps the highest in the world.

Indeed the very edifice of banks would crumble if depositors’ faith is jolted. In Japan a depositor far from earning interest pays for safekeeping of his money a la locker charges. Yet there is no flight of deposits because banks offer the convenience of payment through cheques, cards and digital banking in addition to doing safekeeping. But all these will be badly shaken especially in India at the first hint of the government considering a bail-in regime. That is why Parliament should pass a first ever economic resolution forswearing the obnoxious bail-in clause.

The writer is a Chennai-based chartered accountant