Clearing the air on the bail in clause
Context
The government on Tuesday issued another clarification on the Financial Resolution and Deposit Insurance Bill in a bid to clear the air about the many misgivings about the proposed Bill’s most notorious clause: the bail-in.
What does the Bill seek to do?
- It is meant to consolidate all the various regulatory laws covering India’s financial institution
- It also seeks to create a Resolution Corporation (RC) that will be in charge of winding down, reviving, or resolving in any other way an ailing financial company
- As such, the Bill is to work in tandem with the Insolvency and Bankruptcy Code.
- To do this, one of the tools the RC will be empowered with is a bail-in, in which a bank’s liabilities can be cancelled or modified to shore up its finances. This clause created a lot of alarm as many felt it would put depositors’ money in banks at risk.
Are deposits at risk?
- The government said that under the current Deposit Insurance and Credit Guarantee Corporation Act, deposits up to ₹1 lakh are insured. Under the FRDI Bill, the RC will be empowered to increase this limit to whatever it chooses. So, at least that much will be protected.
- Further, the government said that under the FRDI Bill, the claims of uninsured depositors (that is, beyond ₹1 lakh) would be given precedence over the claims of unsecured creditors and government dues. This is currently not the case.
But what about the bail-in?
- The government has finally clarified that the bail-in clause will not be used for public sector banks (PSBs).
- It also reiterated its implicit guarantee of PSB solvency. In other words, it said that it “stands ready” to bail-out the PSBs if needed, removing the need for a bail-in.
- Equally important, the statement said that the cancellation of the liability of a depositor beyond the insured amount cannot take place without his or her prior consent
- So, the bail-in clause can only be used in private banks, and that too only if the customers allow it.
Is that all protecting depositors?
No. The use of the bail-in clause by the RC will be subject to government scrutiny and parliamentary oversight. In the event of a bail-in, the RC will have to ensure that depositors get back at least as much money as they would have if the bank had been liquidated.
