FRDI Bill: Institutionalized Loot Of People's Savings

For Financing Corporate And Big Loan Defaulters

LAST year we were told that demonetization is a magic wand that would wipe out black money and corruption in the economy. We were told that black money hoarders would get scared and large swathes of cash won’t even return back to banks thus wiping out black money at least in form of large cash holdings, resulting in a windfall gain to the government. After a long wait Reserve Bank of India (RBI) has finally clarified that more than 99 percent of demonetized cash has returned back to the banking channels, making a mockery of all these claims. Even PM Modi has told the nation in his Independence Day speech that out of all the deposits after demonetization only Rupees 2 lakh Crore have been identified for detailed scrutiny by income tax department. How much is this ‘black money’ - even if one presumes that all of this would be established as such, and even if we ignore the option of paying 50 percent income tax through voluntary disclosure scheme declared by Government after demonetization? Just Rs 1,600 per citizen – a laughable amount compared to the tall jumlas of providing Rs 15 lakh to every citizen!

Actually a little economic analysis of facts in public domain would reveal that demonetization was never intended to be an attack on black money. Even the Government’s own Central Board of Direct Taxes (CBDT) 2013 report tells us that only 6 percent of black money unearthed in income tax raids are in form of hard cash, the target of demonetization. Then what was real intention of demonetization? One of the several structural intentions of demonetization was to increase market share of formal organized sector in the economy at the cost of more labour-intensive informal and unorganized sector which is more dependent on cash economy. Through analysis and real life experience of the whole year after demonetization, it is clear that demonetization has also turned out to be a shock therapy attempt to suck small cash savings of people in order to infuse much needed liquidity in banking sector to address the banking crisis. In order to retain the forced cash deposits in banks for a comparatively longer time to maintain liquidity, even the banking rules regarding number of withdrawals and minimum balance in savings accounts along with charges on maintenance of minimum balances and withdrawals were modified at cost of ordinary depositors after demonetization. But even such attempts to infuse liquidity through forced demonetization were not sufficient to address the banking crisis and banks were needed to be recapitalized to the tune of more than Rs 2 Lakh Crore through budgetary provisioning to meet international norms in wake of banking crisis recently.

The Financial Resolution and Deposit Insurance Bill (FRDI Bill) though similar in intention in that it seeks to nullify the traditional protection available to depositors of banks to tap that for addressing banking crisis, is different and even more dangerous than demonetization in the sense that it is not one-time shock therapy but an institutionalized effort in that direction which if enacted will have severe implications for whole banking and financial system of the country.

Origins in G20 agreements in Aftermath of Global Economic Crisis

It is well known that several of the private banks and financial institutions in the US and other major economies of the West were bailed out by the governments of the respective countries. These led governments and financial think-tanks of a neo-liberal outlook to reflect on new methods to finance huge bailouts. Here lies the origin of the concept of ‘bail-in’, which was first used in Cyprus.

The concept is unique in the sense that instead of governments bailing out banks and financial institutions at time of their crisis by providing bail-out packages through budgetary provisions, it is depositors of these banks who would now be forcefully called upon to foot the financial bill of addressing the crisis of banks and financial institutions! Hence the term ‘bail-in’ as depositors would have to either forego a part of their deposits or accept that their deposits can be converted into other type of financial instruments say shares for the time being as the case may be to rescue the banks in crisis.

Agreements for enforcing provisions of ‘bail-in’ by enacting laws were adopted in G20 supposedly as part of a global effort to deal with 2008-like situations where financial institutions in the US and major economies of the West got stressed in wake of global economic crisis. Indian ruling elites readily concurred with this agreement at the G20 which in essence was nothing but rubber stamping of an agreement reached at the Financial Stability Board (FSB) which practically guides the banking system worldwide now and which is traditionally controlled by G7 nations.

Thus the FRDI bill is a wholesale adoption of the G20 agreement which intrudes upon the sovereign rights of individual nations and scope for policy measures by central banks to deal with banking crisis considering specific situation of respective countries as and when they arise. A country like India, which is a savings-based economy with traditionally strong share of Public Sector Banks (PSBs) in the banking sector simply can’t have same type of prescription for the banking crisis which may have some applicability for, say, a US-type economy with large private sector banks that faces the syndrome of Too Big To Fail (TBTF).

Recipe for Disaster for Indian Banking and Financial System

The Financial Resolution and Deposit Insurance Bill (FRDI Bill in short) was introduced in the Lok Sabha on last day of the last session of Parliament and was referred to a Joint Parliamentary Committee. It is said that the Government intends to enact the bill in the Winter Session even when no meaningful public debate has taken place yet on a Bill with such huge implications. The provision of ‘bail-in’ (explained earlier) in the bill has raised many eyebrows and is now being discussed in public fora. Besides that, the bill provides for creation of a Financial Resolution Corporation Authority with wide absolute powers to deal with situations when banks are defined as being in crisis. The Corporation will classify banks and financial firms based on their risk factors as low, moderate, material, imminent, and critical. In case of critical firms, the corporation will be empowered to take over and resolve issues within a year. The Bill empowers the Corporation to take corrective actions such as merger or acquisition, transferring the assets, liabilities to another firm, or liquidation. The bill provides that Corporation as part of resolution mechanism can provide for scaling-down the number of employees in the stressed firm, transfer them or issue pay-cuts. It is such provisions that have made banking employees union rightly emphasize that FRDI Bill is nothing but a road to privatization of banks from the backdoor on the pretext of financial resolution of crisis - while attacking the rights of bank employees.

The bill also empowers the Corporation to determine the amount that would be paid to the depositors on condition of liquidation, in consultation with appropriate regulators. It also does away with guarantee of Rupees One Lakh presently available to depositors through Deposit Insurance and Credit Guarantee Corporation (DICGC) as the deposit insurance would be taken over by the proposed Resolution Corporation. It is not clear yet how much of the deposit would be guaranteed in the proposed new mechanism though the Bill states that the guaranteed deposit amount would be out of the purview of the ‘bail-in’ clause.

It is clear that the bill gives the Resolution Corporation sweeping powers replacing the powers currently enjoyed by regulators like RBI, SEBI, IRDAI in some of the domains. In that context the appointment process of members to Resolution Corporation makes it even more worrying as it would be dominated by representatives of Finance Ministry and would also function under Finance Ministry. Thus the control of Central Government on the proposed Corporation would be almost absolute and whatever little autonomy existing regulators had would be curtailed without any alternative mechanism of checks and balances. It seems that the Government is hell bent on assuming institutionalized control over ways and means to address the banking crisis to bring it in line with the G20 agreement. The latter seeks to reduce the Governments’ budgetary role while shifting the burden of rescuing banks in crisis on depositors who have least role in creating the crisis at first place: the genesis of the crisis after all lies in Non-Performing Assets (NPAs), the majority of which are held by corporate and big borrowers.

Non-Performing Assets (NPAs) at Root of Banking Crisis

The current banking crisis in India due to which the need of infusing liquidity and recapitalization arose in the first place, has its genesis in the problem of Non-Performing Assets (NPAs), the major share of which is due to lending to corporate and big borrowers. NPAs in their turn are the result of continuation of the neo-liberal model of infusing credit-based consumer demand in the economy and stretching PSBs to lend to infrastructure projects under the Public-Private Partnership (PPP) route especially to create much-needed demand in aftermath of global economic crisis. The impact of the crisis may have been reduced to some extent through these methods at that time but the related risk got built up in the banking system over time, and is now manifesting itself in the form of accumulation of NPAs.

According the RBI's Financial Stability Report released in June 2017, the gross non-performing advances (GNPAs) ratio of all banks stood at 9.6% as of March 2017.The extent of crisis can also be made out from the fact that CARE Ratings report as carried by Hindu Business Line (August 17, 2017) states that NPAs have mounted to more that Rs 8 lakh crore as on June, 2017 of which only SBI accounts for more Rs 1.88 Lakh Crore with 18 PSBs amongst 20 banks with highest ratio of NPAs. The impact of NPAs was also reflected in the bottom line of banks which has taken a hit as shown in successive quarterly results of the past two years of most banks.

Different Approaches to Different Categories of Borrowers

It is not that difficult to make out that the Central Government, RBI and banks have different approaches for different categories of borrowers. Both Central Government and RBI have on affidavit stated in the apex court in a PIL seeking to reveal identity of big bank defaulters (with loans above Rupees Five Hundred Crores who have usurped public money) that they can’t disclose the identity of the big defaulters as it won’t be good for the economy of the country! Contrast this to farmers who are publically shamed every day by banks and financial institutions even when they have failed to pay the debts of banks due to the calamity of crop failure.

As per available data, the big 12-15 defaulters account for almost twenty five of all the NPAs. But in light of the privileged approach towards corporate and big loan defaulters the much touted Insolvency and Bankruptcy Code has also failed to make any meaningful dent to the problem of NPAs as recovery rates continue to hover at an extremely low 10-15 percent.

In fact the present Modi Government, instead of recognizing the systemic nature of the crisis has politically try to divert the attention from its own NPA ghotala (scam) by claiming that it is a UPA creation! How would Modi explain how the recovery rates of NPAs have only come down in March 2016 and March 2015 in comparison to March 2014 – i.e during Modi’s own rule? The rate of recovery of NPAs was 18.4 percent in 2014 and came down to 10.2 percent in March 2016.(Indian Express, January 3, 2017).

Moreover, the total amount of written-off bank loans to corporates in the last three years during Modi rule stands at more than Rs.1.88 lakh crore! This is nothing short of a massive bank-loan scam exceeding the 2G scam of 1.76 lakh crore! But instead of feeling apologetic or ashamed at this massive corporate bank loan scam, PM Modi’s Chief Economic Advisor (CEA) Arvind Subramaniam (in an address in Kochi on 14 March 2017) brazenly declared: “The Government should waive the loans of big corporates; this is proper and this is the way capitalism works”. (PTI, 14 March 2017). The RBI has also failed to direct banks to blacklist willful corporate defaulters as a measure to punish those who have forced the banks to bear the burden of severe haircut.


The proponents of the FRDI Bill are arguing that it is a much-needed legislation to address the severe banking crisis and claim that the safety of depositors’ amount is not an issue as the ‘bail-in’ clause is likely to be invoked only in case of banks in critical conditions. But these ideologues need to explain why in the first place the depositors who are at core of whole banking industry especially in a savings-based economy like India where banks still continue to attract as much as 63 percent of all financial investments of ordinary Indian depositors, should bear the burden at all when they have no role in creating the crisis.

The legislative provisioning of such a ‘bail-in’ clause especially when handled by a Resolution Corporation Authority that is in effective control of the Central Government and hardly accountable to ordinary depositors can only increase the risk of bank runs (when a large number of customers withdraw cash from deposit accounts because they fear the banks are failing). Such bank runs which didn’t happened even at the height of the global economic crisis can become a reality if the FRDI Bill shakes the confidence of the depositors about the safety of their deposits.

The steps for addressing the present banking crisis lie in strengthening the recovery rates of NPAs through attacking practices of crony capitalism and favoritism towards big corporate defaulters rather than shaking the confidence of the ordinary depositors which has served the banking and financial system of the nation well till now, otherwise it can only be considered as yet another attempt to push the burden of the economic crisis on the shoulders of common citizens. 

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