What could be its larger implications for savers

Considering the hue and cry around the Federal Resolution and Deposit Insurance (FRDI) Bill, the government decided to put off the debate on the bill to the Budget session. Even though the bill will not be discussed in the Winter Session, it is in order to understand why this bill is controversial

All about the Bail-in clause

Currently, all deposits in scheduled banks are covered by insurance under the DICGC Act. This act assures to protect your deposits in the banks up to a level of Rs.1 lakh. The proposed FRDI Bill will be replacing the DICGC Act. That is still fine, but the big catch is that the new Bill will have a clause called the Bail-in clause. So, what exactly is this bail-in clause? Under the bail-in clause, the deposits will be insured up to a certain level. But the clause also implies that in the event of the bank falling into crisis, they will be legally allowed to use part of the deposits of the depositors to bail out the bank. Effectively, the bank will be authorized to do what the banks in Cyprus tried to do with public deposits after their loans to Greece went bad. Of course, the bank will issue bonds against the deposit but then as a depositor, you will unwittingly become a risk capital provider as against a mere depositor in the bank. That will increase your risk substantially, something you may not really have bargained for. This is more so since bank deposits are the preferred medium for retirees!

Actually, you need not worry

Scratch the surface and there may not be much to worry about you. Even today, bank deposits only insure up to Rs.1 lakh. The only reason the people trust the banks is due to the implicit government guarantee that the RBI will intervene and bail out troubled banks in the event of any crisis. We saw that in case of Global Trust Bank in 2004 and later in the case of ICICI Bank in 2008. It was just the implicit backing of the government that has made Indian banking a preferred source of deposits. In fact, under FRDI, depositors may actually end up getting higher deposit insurance. That will be the right step because Indian banking insurance is woefully low and is just a fraction of the kind of protection that other BRICS nations offer. So the government backing will stay and so there is really not much to worry about!

Need to tread with caution

However, the government must tread with caution. In the post FRDI scenario, depositors will expect a more explicit commitment of safety from the government. That is not a good idea. This could also be unpopular since millions of retirees and senior citizens rely purely on bank deposits for their relative safety and steady returns. FRDI Bill could be economically and politically sensitive. In the Indian context, it may be best to tread with caution! ©

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