Now a nightmare for Bank Depositors

Asis Ranjan Sengupta

The Financial Resolution and Deposit Insurance (FRDI) bill which was tabled in Parliament in August last, is now under the consideration of a Parliamentary Select Committee, which will submit its report, and after that the Bill is likely to be passed in the forthcoming Winter session. In case of any trouble, it is not unlikely that it will be passed as 'money bill' without much debate. The present Government has shown its tactic of avoiding Parliamentary process on many previous occasions. Moreover, it has to be observed that the highly debatable bill was placed in public domain only for twenty days, then suddenly placed in the Parliament in last August, and more speedily referred it to the Joint Select Committee of the Parliament. No waiting for public gaze, examination and opinions or consulting all stake holders like the depositors or Banking Unions that are committed to safeguard the employees. Same impatience and hurry as was seen in the implementation of GST, is also evident here.

Earlier, Banking Regulation Act was amended to make room for the Bankruptcy Law, purportedly to punish the willful defaulters of the Banks, and speed up the process of assets liquidation, in order to restore the health of Public Sector Banks, in particular, who are suffering badly under the burden of stressed assets.

Then came the Recapitalising the PSBs to gear up the capital base so as to survive under severe strain, but unfortunately, none of these steps, could cheer up the economy, as Indian corporate and political circles, still treat the PSBs as their looting fields. They are looting by lowering the interest rates, at the cost of common depositors, though the reduction in cost of production, subsequent to the lower cost of working capital, has never been passed over to the consumers. And the Public-Sector Banks are struggling under huge unpaid debt burden, without any positive gesture by the law enforcement agencies to recover them from the handful few big Corporate houses.

Now, to ensure further plunder of the depositors' money to recover the Banking system, this new bill of Financial Resolution and Deposit Insurance, has been brought in. So long the Deposits in Banks were insured only up to one lac, against each depositor, but they enjoyed an unwritten guarantee from the government of India and RBI, as the custodian of Banks, and the job was being discharged by DICGC (Deposit Insurance and Credit Guarantee Corporation), for which Banks were paying hefty insurance fees, each financial. Now this DICGC, has been sought to be replaced by the proposed 'Resolution Corporation', which will do away with the threshold limit of one lac, and propose, different Insurance values for different types of accounts, and customers, as also for different Banks, according to their health.

The basic job of this so-called Resolution body, would be to take away the job of RBI to supervise and control the Banks, and ensure strict vigil on their activities, and undertake the hair-cut process to restrain the management in certain aspects and provide direction. Instead this new body will ensure the speedy liquidation of troubled Banks or Insurance companies, in a systematic and speedy manner. Thus, it will no longer take care of the interest of the depositors, or other stake holders. The strict steps initiated by RBI has to haircut the stressed Bank management, has failed to restore the either recovery or other parameters. So, it has become necessary to do away with all the parties in between, that is RBI and the Bank Managements. This new Resolution Body will just ensure quick liquidation, without caring for the Employees or management staff either.

The most alarming clause of the bill is the "Bail In" provision. So far Banks had been receiving "bail outs" from the Governments, to restore the Banks' health and ensure the security of the depositors. In USA, the failed Banks and Insurance Companies, that went into red consequent upon so-called sub-prime lending crisis, in 2008-9, received huge bail outs from the US Government. But this bill absolves the Government from any such liability. Now, what is this 'bail in?' Bail-in means, in short, to provide capital to the Bank or Financial institutes, to absorb the losses and ensure survival. Here the survival does not mean the safety of the depositors' money, but restoration of the capital of the bank. This bail-in empowers the proposed Resolution Corporation to cancel the liability owed by the Bank, or change the form of the existing liability, to another form of security. The money in deposit accounts, be it savings or fixed, is a liability owed by the bank to its customers. The Banks unconditionally promises to pay it back to the customer, as and when demanded by the customer. As the customer has not taken any security, when handing over the money to the Bank, in legal terms, every customer is an unsecured creditor of the Bank. But with this 'bail-in' concept, Bank may simply refuse repayment of the customer money, and instead issue securities, such as preference shares etc with no guarantee of any fixed dividends. And the deposited money converted into stocks, will be used to recapitalise the Banks.

Let us be a bit more illustrative. Suppose a Bank, say, for instance SBI, has currently total public deposit of 20 lakh crore rupees. If for some reason, SBI were to become unviable or vulnerable enough to be referred to the Resolution Corporation, as proposed in the new law, there is a real possibility that at least 10% of all deposits, which amounts to 2 lakh crore, may be converted into either equity shares or interest bearing preference shares of the Bank, and handed over to depositors, who may have no choice in the matter. So, a part of the deposits gets converted into shares of the Bank. The partial change in the nature of deposits ends up shoring up SBI's capital, that may have got completely eroded due to massive write-offs caused by non-performing assets run by big business. So, big business erodes the Bank's capital, and millions of depositors contribute Rs 2 lac crore as fresh capital. The central government, the owner of PSU Banks, also escapes the responsibility of pumping in fresh capital. Using depositors' money to shore up capital also helps the government to claim fiscal prudence in order to impress the Moody's and other rating agencies. Theoretically, the new bail-in clause creates a happy situation for the government and the cronies. After much attack, Finance Minister Arun Jaitley allayed the apprehension of public by hinting at the summary review of certain parts of the bill, presently lying with the standing committee of Parliament. But everybody knows that he is a master hypocrite and nasty double speak, none trusts him or his government. Jaitley's remarks and comments on the public reaction, clearly show his casual and careless attitude that annoyed everyone in Demonetisation disaster days. Or it may also be, that he never cared for going through the text of the bill at all. The government knows very well that the implementation would be difficult and painful for the people. But at the same time, they have also mastered the art and science of passing the pain to the people, through Demonetisation and GST experience, by creating euphoria over such ill-conceived drama of fake morality, false sacrifice and pseudo Nationalism.

Only the money, which is insured, cannot be bailed in. So, it may be possible that the amount under insurance will not only vary between customers of different banks, but even between customers of the same bank. Thus the bail-in clause will change the nature of Banker-customer relationship altogether. Bank accounts will no more be safe investments, but it would be akin to buying shares or units of mutual funds. The investor must study the market risk factor, and take timely and wise decision, for switching accounts from here to there.

But one thing must be kept in mind that customer deposit is the basis of the Bank business. Bank depositor cannot be treated at par with the stock market investor. Hence the rules for normal bankruptcy cannot be applicable to Banks or identical financial institutions. The sooner the policy makers and the government realise the reality, the better. But interestingly and unfortunately, the responsible government fails to take cognisance of the vital points, while presenting the FRDI bill. Figures from the Banking circle show that 82% of the total Banking business in India, is covered by the Public-Sector Banks. But this exercise very much like banning 86% of currency overnight, in so-called demonetisation, must further deal a fatal blow to the national economy. The proposed bill seeks to override all the existing laws guiding the Banks and Financial institutes. The State Bank of India Act 1955, and Banking acquisition and transfer act of 1969, prohibits the liquidation of Banks, but the proposed bill, will make those invalid, and not only that it will erode the role of RBI as the custodian of Banks, monitoring and deciding their fates. Thus, the Reserve Bank of India Act, will also stand amended by the new bill. According to the chapter II of the bill, the proposed Corporation will have a chairperson and one representative each as ex-officio member from the Finance Ministry, the RBI, SEBI and Insurance Regulatory and Development authority (IRDA). It will also have maximum of three full time members appointed by the Union Government, and two independent members. The very composition of the corporation ensures supreme powers to the Union Government, rather than RBI, the custodian of Banks heretofore, to determine the fate of a bank.

The Bill in the current form, looks like targeting the PSBs. Instead of the loan defaulters, and frames to dilute the Banks and not the defaulters under the law, no court other than the company law tribunal can deal with the disputes in connection with the liquidation. There are clauses in the bill that enable ‘The Resolution Corporation’ to terminate the employment or change the compensation structure of Bank employees when the bank goes through the various stages of liquidation. The employees may not be able to claim compensation for loss of employment, which, according to the Bank unions, is a direct violation of the right to constitutional remedies, guaranteed under Article 32 of the constitution. Further, the bail-in exercise which will impound the deposits at the sweet will of the government cannot ensure that the capital infusion can restore the health of the Bank, as that would be subject to market risks. So the moment news of a particular Bank becoming sick hits the headline, there will be mad rush for withdrawals, that will further expedite the fall or 'run' of the Bank and the loss of the credibility of the economy. So, the bail-in, for all practical purposes, is bailing out big corporates, and big defaulters by small depositors. The depositors’ faith in the Nationalised Banks, stems from the root that the government will bail out in case of crisis, and save their interest, but this new bill indicates that there will be no bail out from the government side henceforth.

Under section 52 of the FRDI bill, suppose you have deposited Rs 10 lakh for 5 years, for say your child's education or daughter's marriage, the Bank may convert the liability into 20 years tenure, even without your consent, owing you only a dismal payout time to time. And you can do nothing, as no court can intervene, unless you challenge the very laws. And everyone knows the lengthy and arduous legal process, as also the cost factor. This bail-in provision was implemented in Cyprus in 2013, as a result, the uninsured depositors, lost almost half of their deposits. However, they received stocks in the Bank, in lieu, but the value of the stocks was far less than that of their loss.

After the note ban and cashless agenda, Indians are now set for a loss of their meagre assets in Banks or other financial institutes. After driving the public into the Banks, forcing them to open accounts, and parking their banned currency in accounts, now the conspiracy is to rob the deposits to bail out the corrupts. This 'robbing Peter to pay Paul' policy may also be used as a scarecrow to frighten the Bank people, in all tiers, from Management to Unions, and the Depositors to drive them away from Banks to share market and mutual funds, full of uncertainties and market risks. Otherwise, no sane Government can take such suicidal step. Finance Minister Jaitley has allayed the fears of the public as baseless. But in that case also, no one trusts him of his peers, and have every reason to be scared. But the Government of India is in a helpless corner, as a signatory of G-20 agreement, they are under compulsion to carry out such 'reforms' which are anti-people and pro-big corporate.

Apart from the G-20 factor, there are other compulsions, as some leading print media exposed the conspiracy, from the hint given by Banking Industry Union circles, and that is something like this. India is now passing through a frenzied denationalisation spree. As per prevalent legal structure, insolvency and Bankruptcy Code 2016, though competent to deal with bankruptcy of individuals and firms, cannot cover banks or Financial Institutions, in terms of Savings Bank Act 1873, and RBI Act 1934. National Company Law Tribunal cannot decide upon or execute their liquidation, so the government badly needs an overriding law urgently for preparing the legal basis for liquidating sick Banks and Financial Firms. The Modi government is following the multi-track method of expediting recovery, with no effort, recapitalisation, at a rate much lower than needed and liquidation of sick Banks or Finance Firms like Insurance Companies etc. Further there is another point, government of India has taken 2 billion dollars loan from World Bank, and nearly 4 billion dollars is in the pipeline, so a supreme law is needed to invalidate provisions of Indian Contract Act 1872, and Transfer of Property Act 1882, otherwise it won't be possible to transfer the ownership of Public Sector Banks, to private Corporates.

The process of Denationalisation is already in the process, the four big "Indian Banks", namely, HDFC, ICICI, Axis and Kotak, have 62%, 55%, 38% and 74% respectively have foreign share investments each. And these managements eye for taking over certain viable entities, when put to liquidation. Thus evidently, the saffron Nationalists are offering public Banks to foreign controlled 'Indian' Banks. Actually, Indian Banking has got three phases, first is the British era, second is post Independence era, and the third is post Nationalisation era. In the first two phases, Banking was limited to the rich and wealthy. It was strictly a "Class Banking" catering to the needs of a particular class. Common people had no access to the Banking system. But with the growth of the concept of social Banking, the need for Nationalisation was felt, firstly to bring in discipline in the system, and make it tool of economic development. With Nationalisation, opening of branches all around, and financing the 'hitherto neglected' sectors of economy of common people, this very Banking in India became "mass Banking". The cost of transformation, effected by takeovers, cost the public exchequer, but it was negligible compared to the benefits and mammoth growth of the sector. But the misutilisation, under political patronage, by a handful few crony capitalists, has inspired the government to effect a reverse paradigm shift from 'mass' to 'class' Banking again. And the cost this time has to be borne out by the hapless people, and this Financial Resolution mechanism is in that direction. It may be noted that SBI had its own money wallet modules like SBI BUDDY, but recently they are forced to launch another new wallet, Reliance Money, with the Reliance group headed by the Ambanis. This is a pointer to how the activities of Public Sector Banks will be made to surrender to and make space to private players. Financial Resolution is but a major part of that exercise. But unlike Demonetisation or the GST strike, this one would be a protracted process, ensuring slow poisoning to death. This Resolution bill is a vital part of that poison administration machinery. It would not be like sudden late evening raid of November 2016, or the carpet bombing since July 2017, a systematic administration of lethal drugs, in varying intensity, low, medium and high, over a period of time, so that public money in safer zones, may gradually but steadily evaporate into unsafe coffers of the Corporate.

The indigenous Asset Reconstruction Companies, are not allowed to take over stressed assets of PSBs, at random, as they have to follow certain rules and regulations, but these foreign funded Indian Banks and Finance institutes, are eager to take over a large number of these assets. What is problem and handicap for one, is grand opportunity for others, as they need not care such rigorous observance of fair practice and transparent procedure codes. India's no. 1 Asset Reconstruction Company (ARC) owned by ICICI Bank, ARCIL by name, has already purchased such assets worth 12.6 billion US dollar. Other such ARCs run by Ambani, Adani, Aditya Birla, Uday Kotak (Kotak Mahindra) are jumping into the fray, they are describing this as "once in a life time" opportunity. Previously, the Entrepreneurs of medium or small Industries were running from pillar to post to save their firms being referred to ARCs, but on the contrary, they are now lobbying for being referred to these ARCs, the mystery lies elsewhere. Some firms have already been referred to liquidation mechanism, but there is no transparency in selection of firms. No clarity about which firm is selected. Recently the act of insolvency and bankruptcy has been amended to prohibit the relations and connections in taking part in the process of auction. The main purpose is to ensure the smooth take-over by these private ARCs. The fraud mechanism is required to be followed in the whole exercise. To put in a simple way, it is something like this. Suppose you have a unit running with a debt of 100 crore rupees with a nationalised Bank, you become a willful defaulter, and expedite the process of bankruptcy and liquidation by dubious method. Now this asset will be handed over to such an ARC at a discounted price of say 70 crore. The shortfall will have to be written off by the Bank, from the books, from own funds. The capital erosion in the process will be compensated by the depositors’ fund 'bail-in'. Then the same asset will be sold back to the same person or non-personal entity in a different name, by say 80 crore by the said ARC. This will yield outright gain of the ARC to the tune of 10 crore, and a benefit of 20 crore to the entrepreneur house. The worst sufferer would be the common public, who had parked their hard-earned money in Banks and other finance organisations like insurance companies. After demonetisation, this is another organised loot of the public money, and this new Resolution and Deposit Insurance law is badly and urgently needed by the Indian and overseas Corporates, to institutionalise this plunder.

There are few other relevant pertinent points in this connection. Very often nowadays, a favourite idea of a Bank being "too big to fail" is floated. Now this is simply bogus. In present day economic scenario, no Bank can be considered either 'too big to fail' or even 'strong Bank'. During the US crisis, the Banks and Insurance Companies like American Express, Goldman Sachs, or American Insurance Group (AIG) were all both Strong and Big entities. Basel Norms regarding Capital Adequacy, I, II or III are applicable to big and small, strong or weak entities equally. So the idea in favour of liquidating small or weak with big or strong, is all but a hoax. So far in India, particularly after nationalisation, Banks in serious crisis, were rescued by others, as were the cases of United Industrial Bank, New Bank of India or say Global Trust Bank, which, after the liberalisation, emerged in 1994, as a big, strong, state of the art Bank with a global dimension, and rolled down shutters in 2008-9. But in all the cases the depositor's interest remained protected. But it is not going to remain the same, after the resolution bill.

So far as the question of Cooperative Banks, the bill is not clear as yet. The functioning of these Banks were so far being monitored by the RBI. But after the Resolution Bill, RBI's role as a custodian of Banking system will vanish. It is an open secret that, these Banks are happy hunting ground for the corrupt political leaders. During the last demonetisation phase, there were rampant parking of dubious banned currency in these Banks. Due to these political factors, or may be due to some other factors like agriculture crisis, or natural calamity, these Banks are vulnerable to crisis as these Banks operate in remote rural areas, and among farmers or economically backward people. They enjoy supervision from RBI, monitoring by National Bank for Rural Development (NABARD), and Deposit Insurance (DICGC) coverage, in case of crisis, keeping intact the depositors' interest all the time. But after the implementation of this Resolution Law, all RBI, NABARD, DICGC, will be divested of their supportive roles. And in case of crisis, this Resolution Corporation will intervene, and their role would only be limited to putting the Bank in liquidation, and dissolve, without taking any consideration of the stake holders, be it depositors or share holders. Thus the Resolution rules will not only be restricted to Banks of Insurance companies, as evident from the very name of it, that is a very wide financial resolution area, as such it would be competent to deal with all Non Banking Financial Companies (NBFC), P F or Pension funds, under its jurisdiction.

The verbal assurance of Arun Jaitley, bears no value, as previous experience in AADHAAR, GST or Vodafone tax liability cases, people saw that he is a champion U-Turn Specialist, who takes no time to eat up his own commitments, an expert in diving smart back somersault instantly. So Indian people are going to face another Cyprus moment in this country, perpetrated by the conspiracy of a few self-proclaimed ‘patriots’.

Vol. 50, No.26, Dec 31 - Jan 6, 2017