Are we going to lose our savings kept in Banks ? Is my bank account safe ? Is my bank going to take up all the money deposited in my account for my children?
Now a days, these types of question are intriguing everyone's mind. Anyone who has deposited money in bank, expects the Bank to give the same whenever the depositor needs it... What if, the bank denies for the same ? In an attempt to clear the air, we thought of writing below blog...it's just an attempt to make everyone understand the safety of their money in banks and also indicates the current status of the bill.
There are voices in the media that Government of India is planning to table a bill with bail-in provision, for the banks. Csonsequently, the depositors may lose their money deposited in the banks and they won't be getting anything in return. Let's first understand the meaning of Bail-in/out.
There are voices in the media that Government of India is planning to table a bill with bail-in provision, for the banks. Csonsequently, the depositors may lose their money deposited in the banks and they won't be getting anything in return. Let's first understand the meaning of Bail-in/out.
#Bail-in: A bail-in is rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings. #Bail-out: This involves the rescue of a financial institution by external parties, typically governments using taxpayers money. Typically, bail-outs have been far more common than bail-ins..
FRDI(The Financial Resolution and Deposit Insurance) Bill, 2017, introduced in Lok Sabha in August this year during the Monsoon Session of Parliament, which is currently undergoing scrutiny by a joint parliamentary committee. This is the controversial bill, red-flagged by many as anti poor or anti-common man, quoting that your money deposited in banks, would be taken away by government, once they need it.
Let's not jump on the conclusion, lets first understand that unlike European system, how the money in Indian financial system is safe.
Basically in India, there are laws governing banks as mandated by the Reserve Bank of India and the deposited money kept in banks is insured by the Deposit Insurance and Credit Guarantee Corporation of India(DICGC).
https://www.dicgc.org.in/FD_A-GuideToDepositInsurance.html
DICGC, is fully owned by RBI and was formed in 1961, all the deposit banks in India have to mandatorily register themselves with DICGC. One important thing to note here is that your deposit upto Rs. 1 Lakh(Principal + Interest) will always be insured in any registered banks, and DICGC takes the responsibility to pay upto Rs 1 Lakh, in case of Bankruptcy or liquidation. (Its always a good idea to maintain accounts in more than 1 bank). Deposits over Rs. 1 Lakh is treated at par with claims of unsecured creditors, and in the event of liquidation/bankruptcy of a bank, such depositor claims are only paid after preferential payments are made, basically your money will still be yours.
Now, coming to FRDI bill, this does not modify present protections to the depositors adversely at all, this bill seeks establishment of a Resolution Corporation for protection of consumers.
Deposit insurance powers and responsibilities will be transferred to this Resolution Corporation as it is, more power will be given to Resolution corporation and DICGC will be dissolved. The proposed Resolution Corporation will also determine if there is an “imminent risk” of the bank failing financially and will trigger what it feels would be the right remedy, this will include huge data mining and study of risks involved before reaching to any conclusion. The word that has created ruckus is, #Bail-In clause mentioned in clause-52 of the bill, we should not be confused with the Bail-in, that is being used in European Banking system, where Depositors money is used to compensate the Bank's loss. India has a provision of Bail-Out, means the Govt. is liable to pay the debt.
Deposit insurance powers and responsibilities will be transferred to this Resolution Corporation as it is, more power will be given to Resolution corporation and DICGC will be dissolved. The proposed Resolution Corporation will also determine if there is an “imminent risk” of the bank failing financially and will trigger what it feels would be the right remedy, this will include huge data mining and study of risks involved before reaching to any conclusion. The word that has created ruckus is, #Bail-In clause mentioned in clause-52 of the bill, we should not be confused with the Bail-in, that is being used in European Banking system, where Depositors money is used to compensate the Bank's loss. India has a provision of Bail-Out, means the Govt. is liable to pay the debt.
Background:
Budget Speech of Finance Minister Arun Jaitley: In his 2016-17 budget speech, Union finance minister Arun Jaitley said,“A systemic vacuum exists with regard to bankruptcy situations in financial firms. A comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17.”
The Financial Resolution and Deposit Insurance Bill, 2017 is pending before the Standing Committee. The objective of the Government is to fully protect the interest of the financial institutions and the depositors. The Government stands committed to this objective.— Arun Jaitley (@arunjaitley) December 6, 2017
Following the announcement, on 15 March 2016, a committee was set up under the chairmanship of Ajay Tyagi, additional secretary, Department of Economic Affairs, Ministry of Finance(who preiously proposed setting up of Financial data Management Centre, FDMC), to draft and submit the Bill. The committee also had representatives of the financial sector regulatory authorities and the Deposit Insurance and Credit Guarantee Corporation.
The committee submitted its report and based it the draft FRDI Bill was drawn up. The finance ministry sought comments on the Bill till 31 October 2016 and after consideration of the suggestions, the Union Cabinet approved it to introduce it in the Parliament.
Highlights of the Bill:
1. According to the finance ministry, FRDI Bill, 2017 seeks to protect customers of financial service providers in times of financial distress.
2. It also aims to inculcate discipline among financial service providers in the event of financial crises, by limiting the use of public money to bail out distressed entities.
3. The Bill would help in maintaining financial stability in the economy by ensuring adequate preventive measures, while at the same time providing the necessary instruments for dealing with crisis events.
4. The Bill aims to strengthen and streamline the current framework of deposit insurance for the benefit of retail depositors.
5. Further, it seeks to decrease the time and costs involved in resolving distressed financial entities. Once enacted, a resolution corporation will be setup to strengthen the stability and resilience of the entities in the financial sector.
Nowhere, it has been mentioned that depositors will be losing the money deposited or deposit will be badly hampered in any case.Whole Framework and guidelines are yet to be out for this Resolution corporation, so calling this bill as anti poor or against the common man will be too early and immature. I iterate in Bold "TOO IMMATURE"... Political parties, including the Congress and the Trinamool Congress/Channels/Propaganda houses have selectively picked up the word "#Bail-In" of clause 52 to show displeasure. This seems to be convenient way to defame the change, I would iterate that all recommendations have not been finalised yet and no democratic government will ever seize the common man money or will try to enact the anti-common man or anti poor biil.
Joint Parliamentary Committee is making changes in it based on the suggestion received from the people. Ministry has already indicated that changes in the FRDI Bill is on the cards, so let's wait for the winter session to begin...
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Very good post
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