Monday, September 27, 2021
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Is your bank deposit safe?

Banks are considered to be the most convenient and reliable organisations to safe-keep money, but what if the bank in which you deposit your money fails? Confused? Worried?

Behind the coating of “all is well” promoted by the government, the political elite begins the legislative option that will authorise them to freeze your deposits to save banks from failures.

Like me, you also might have heard divergent views on the Financial Resolution and Deposit Insurance Bill 2017. The culprit is Clause 52, dealing with “bail-in’ provision, under which, depositors will “lose their rightful claim to retrieve their savings in case of liquidation of banks and insurance companies….”  Presently, the Bill is with the parliamentary standing committee.

The “bail-in” clause can use customer deposits to bail out a failing bank. Currently, the Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, covers up to Rs 1 lakh per person. If you have, say, Rs 10 lakh of FDs and your bank fails, then all you will get is maximum of Rs 1 lakh. Thus, your deposits were never safer.

True, the Indian banking system doesn’t have any failure history, and RBI always facilitated merger or taken other measures to fight against any banking outage.  Even if a private sector bank crashes as the Global Trust Bank did, the depositors’ stakes were protected.

Why, then, the uproar? If the Prime Minister’s assurance that bank deposits would be safe is to be believed, why have Clause 52, in the first place? Despite the assurance, there is a definite need to revisit the pittance insurance cover, being in force since 1993, unmindful of the inflation uptrend. Also, are the insurance funds adequate to handle a major collapse?

Is Indian government proposing Cyprus model as a future template in dealing with troubled banks? The bail-in provision in Bank of Cyprus in 2013 rendered the depositors losing half their money which was uninsured. Such pre-emption of depositor money happened in many European countries post the 2008 melt-down. The panic button will make depositors to deliberate on alternate avenues of investments, which can result in fight of deposits.

The government must communicate clearly the grounds behind the “bail-in” clause. Else, the perceived risk of holding FDs would opt depositors to “cash-mode”, the ambitious “digitalisation” taking a severe dent. To diversify risk, people may also look elsewhere. Already, money flowed in after demonetisation was channelled into mutual funds, thanks to the dwindling rate of interest. The ‘bail-in’ aberration will only further fuel the equity sentiments, which is, nevertheless, not a wrong choice.

Will the Bill restrain indiscreet lending? 

As the NPA menace remains, our deposits can eventually be used to address the bad loans. This is an anti-people Bill, affecting senior citizens in particular.  Both “bail-in” from depositor funds and “bail-out” from taxpayer’s money demerit popular welfare. Basic economics impart that “banks are financial intermediaries engaged in the task of linking perspective lenders with prospective borrowers”. Who are the “perspective lenders”, if not the depositors? Though the “bail-in” is accepted mainly in G-20 countries (India inclusive), it is inappropriate for Indian banking system, as “credit” is the lifeblood of industry and commerce. Aren’t deposits the backbone for banks?

Even after accepting corruption and favourable terms for the big and the mighty, average Indian has maintained that his money is safer in our banks. It will be politically suicidal if the Bill is passed in its existing format, as the 2019 Lok Sabha elections is not far away.

We have RBI and other regulators. Make bank managements and Boards accountable. NPA figures should be displayed on bank websites so that depositors can take informed decisions. Attach the assets and freeze the accounts of those officials who advanced imprudent loans, and order criminal prosecutions. Socialising the losses for someone’s crime is plain unfair.

Does this also give an option for depositors to choose which bank is safe?  Those who have access to inside information are “fortunate” to move away from the rotten ones, and the larger depositors could well migrate to other investment options like debt funds or even investment funds that projects higher returns, leaving the small savers in the lurch.  Is this bill also applicable for post office deposit accounts? In the case of public sector banks, government is the sovereign owner and it should guarantee the safety of depositor funds.

The “bail-ins” will be an alternative channel to “recapitalise” banks. This time, tax payers will escape, depositors will be punished. As honest citizen, either way you lose. The money in one’s fixed deposits is one’s own money, not the bank’s, not even the government’s, to be fiddled around with. Nothing should be done to kill public confidence and ethical governance.

Finally, can the next source for reckless banks be your deposits? At the moment, it is more academic.

(The views expressed by the author in the article are his/her own.)

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