After enacting a law to deal with insolvency and bankruptcy of non-financial companies in Dec 2016 (Insolvency and Bankruptcy Code, 2016) and creating a regulator, Insolvency and Bankruptcy Board of India, the Modi government has now proposed a bill to deal with the failure of financial institutions, Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill). The bill is expected to be passed during the winter session of the Parliament starting on 15 Dec 2017.
So far whenever a bank was under distress or needed additional capital, the government would step in and bail it out. The government bail-out would, of course, be out of the taxes paid by people. No major bank has been allowed to fail since 1969 when 14 largest banks were nationalised. Further, the Deposit Insurance and Credit Guarantee Corporation Act of 1961 insured deposits of up to Rs. 1 lakh of people in a bank in case of its failure. All this instilled a faith amongst people that their savings kept in an Indian bank were safe and would be available to them whenever required.
The FRDI Bill draft has many provisions which would change all the above. While making the budget speech in Feb 2016, the Finance Minister said that the government was keen on setting up a framework that would instil better financial discipline among banking institutions and make stronger provisions to protect public money. However, the draft FRDI Bill has raised anxieties in the minds of working people that their savings deposited in banks are no longer safe.
The Bill proposes to create a Resolution Corporation which will determine the level of the risk of the bank failing and will propose corrective actions accordingly. It will also replace the Deposit Insurance and Credit Guarantee Corporation and take over the role of providing deposit insurance. However, the Bill does not specify the insured amount nor the amount a depositor would be paid in case of bank liquidation.
What is worse is the ‘bail-in’ provision in the Bill. The ‘bail-in’ allows a part of the money of depositors to be robbed and used to save banks. Under Section 52 of the FRDI Bill powers of the Resolution Corporation are so extensive that it can cancel a liability of a bank — which means that it can declare the bank doesn’t owe you any money though you have deposited your hard earned savings with it. Under the same section, it can modify or change the form of deposit. It means that if you have deposited, say, Rs 2 lakh in your savings account, it can convert it into a fixed deposit for, say, 5 years or if you have deposited Rs 2 lakh for 5 years in a fixed deposit, intending to use the money for your child’s education, it can be converted into a locked-in deposit of 20 years without your consent. Or, it can convert a part of your deposit into shares of the failing bank without your consent.
There is also a major concern among bank workers about the violation of their rights. There are clauses in the bill that enable the Resolution Corporation to terminate employment or change the compensation structure of bank workers. The employees may not be able to claim compensation for loss of employment, which, workers say, is a direct violation of the right to constitutional remedies guaranteed under Article 32 of the Constitution. The actions of the Corporation cannot be challenged in any court of law except in the Company Law Tribunal.
As pointed out in pamphlet “On the Note Ban: Real Aims and False Claims” published by the CGPI in January 1917, the proposal of ‘bail-in’ was first mooted in 2009 when the major imperialist powers set up a Financial Stability Board to come up with ways to prevent failure of big banks. The proposal was endorsed in 2014 by the G20, including the Indian government. The FRDI Bill draft is thus a part of the commitment given to international finance capital.
Faced with the rising public consternation about the bill, the Prime Minister and Finance Minister have attempted to assuage these concerns. However, the government’s clarifications are deliberately vague, and not directly addressing the issue of potential risk to the funds of the depositors.
It is criminal to ask depositors to bail-in a bank failing due to refusal of capitalists to repay their loans.