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Alarming financial reforms

Is Financial Resolution & Deposit Insurance Bill, 2017 loaded with dangers?
Srinagar | Posted : Dec 7 2017 1:44AM | Updated: Dec 6 2017 11:26PM
Alarming financial reforms

While continuing the last week’s debate on ‘Dangers in reforms’ in my previous column (What’s up), let’s go through some critical reforms impacting exclusively the financial sector companies. The reforms on the anvil are being triggered through the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 which is to be introduced in the coming session of the Parliament. The aim of the Bill is to exercise control over banks, insurance companies, regional rural banks (RRBs), cooperative banks and other financial institutions.

Before deliberating on the Bill, it would not be out of place to revisit Cyprus crisis when four years back the country became an epicenter of market anxiety. The country's banks collapsed amid the integrity of the eurozone hanging in the balance. A “bail-in’’ was brokered and bank depositors were forced to pay for a eurozone rescue.

Precisely, as a part of plan to pull the Cyprus out of the financial anxiety, among other things a portion of the bank depositors’ money in Cyprus banks was seized to cover bank losses. The Cypriots during the mid March 2013 were astonished to wake up to discover that their government had seized up to 10% of everyone's savings from their bank accounts without warning. Even as Cyprus has recovered from the banking crisis, deep scars still remain as a constant reminder to its citizens, especially bank depositors, who had lost their hard earned money for none of their faults to bail out the country from the financial crisis.

Now coming back to a series of contemporary financial sector reformative measures back at home, the introduction of the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 in the Parliament is going to be a historical step to ‘insulate’ the country against any deep rooted financial anxiety. Once enacted, a Resolution Corporation will be setup to exercise control over all companies falling within the realm of financial sector.

Here understanding the contours of the FRDI Bill is of utmost importance for financial service providers as well as the customers availing their services. The Bill exclusively revolves around a situation gripped in financial distress and envisages protection to customers of financial service providers in times of financial distress; and preaches lessons of financial discipline among financial service providers in the event of financial crises, by limiting the use of public money to bail out distressed entities. It also offers to maintain financial stability by ensuring adequate preventive measures, while at the same time providing the necessary instruments for dealing with crisis events. The Bill also aims to strengthen and streamline the current framework of deposit insurance for the benefit of retail depositors. Further, it seeks to decrease the time and costs involved in resolving distressed financial entities.

The Bill also envisages closure of the so far rarely tested “Deposit Insurance and Credit Guarantee Corporation” (DICGC) established in 1961, which has been an insurance cover for the savings of depositors up to Rs 1 lakh.  This would be replaced by a ‘Corporation Insurance Fund’ to insure the deposits just like in the current regime. 

Currently, banks pay a deposit insurance premium, which is held by the Deposit Insurance Corporation, and in turn used to pay out depositors if needed. 

What all these ‘offers’ envisaged in the Bill mean? The Bill is simply loaded with dangers with serious consequences both for financial companies like banks and insurance companies and their customers. As envisaged in the Bill, any financial distress would see amalgamation, merger, liquidation and acquisition of any bank, and any insurance company. As contained in the Bill, even discontinuation of service of employees or transfer of their employment or reduction of their remuneration is also an option to overcome any financial distress of a bank or an insurance company.

In nutshell, the current financial sector reforms are redefining the entire financial structure of the country only to remain at the mercy of the government.  The ‘Resolution Corporation’ once comes into being will have adverse impact on the functioning of the financial regulators like Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI). These regulators would be losing teeth as banks, insurance and other financial companies would left at the mercy of this Corporation, which in turn will be subservient to the Finance Ministry.

In the name of deposit insurance also, the Bill goes against the interest of small depositors through its provision of ‘bail-in’. Bail-in’ is one under which creditors and depositors absorb some of the losses in case a financial institution fails. In case of a ‘bail-in’ the depositor rather than a borrower is likely to lose a portion of money deposited in the bank account. 


(The views are of the author and not that of the institution he works for)