If you thought bank deposits are a fool-proof place to keep your money, think again. In August 2017, the Financial Resolution Deposit Insurance (FRDI) Bill was introduced in the Lok Sabha causing mass hysteria and panic among the public.
1. Why was the FRDI Bill introduced?
Banks in India are in the middle of a crisis. Because some banks allowed multiple customers to borrow huge sums of money that they’ll never be able to repay, they’re stuck with crores worth of unrecoverable loans (a.k.a stressed assets or non-performing assets). Usually the Government bails out these financial institutions because letting them go bankrupt could have catastrophic effects on the economy. The Government merges the bank with another financial entity, or they use your tax money to rescue them.
To buffer the poor tax-payer from this economic nightmare and to prevent banks from taking this bailout option for granted, the Government introduced the FRDI Bill.
2. What is the FRDI Bill?
The FRDI Bill forms an entity called the Financial Resolution Corporation (FRC) which would monitor all financial firms like banks, insurance companies, stock exchanges, etc. from going
bank corrupt bankrupt. The FRC would classify these firms by their level of risk, carry out regular inspections of these firms and, if the firm was failing, they’d take over control.
3. Sounds great, what’s everyone’s problem with it?
The catch to this too-good-to-be-true Bill is it’s ‘Bail-in’ provision. Bailout money comes from an external party, bail-in money comes from internally. Under this provision, banks would use money from their depositors accounts (i.e. your bank account!) and from their shareholders to lift themselves out of bankruptcy. They could declare that they owe their depositors nothing or they might even offer them shares in return for their money. In a nutshell, if you have an account in a failing bank, you could potentially run the risk of losing all your money or getting shares of a failing bank!
4. Does this mean bank deposits are not safe at all?
Responding to people’s anger, the Government has assured the public that the FRDI Bill is depositor-friendly:
- Under another law, the Deposit Insurance & Credit Guarantee Corporation (DICGC) Act, your bank deposits of up to Rs. 1 lakh are insured; and it will continue to be insured even after the FRDI Bill is enforced. Even though this limit was set in 1993 and doesn’t account for inflation over the years, the Government has promised to increase this insured amount when they discuss the FRDI Bill.
- Even with cases of failing banks being rescued by bail-ins in the past, customers have rarely lost their deposits
- Under the FRDI Bill, such a bail-in would not happen without consent. It will only affect you if you’ve given your consent to the bank at the time of signing your deposit form
Even though the Government has your back, one way you might consider protecting yourself is by dividing your money among multiple bank accounts, because each bank has an insurance limit of Rs. 1 lakh.
5. Will an FRDI Bill make banks more accountable?
Yes. With the new FRDI Bill, customers will know that their deposits are at stake when they open a bank account, and so they will choose their bank more carefully. Shareholders will also be wary before investing in stocks of a high-risk bank. Fear of losing business and tarnishing their reputation will motivate banks to operate better.
6. What is the status of the FRDI Bill?
The FRDI Bill has only been introduced to the Lok Sabha. It might go through some revisions before it gets passed. After that it will be introduced and passed in Rajya Sabha. Even though the Bill is being debated weekly, it is unlikely that it will go from Bill to Act in 2018.
What are your thoughts on the FRDI Bill? Let us know in the comments below.