‘Bail-in’ dilemma

Anger against FRDI Bill 2017 brewing up

Sajad Bazaz
Srinagar, Publish Date: Dec 12 2017 10:07PM | Updated Date: Dec 12 2017 10:07PM
‘Bail-in’ dilemma

Gone are the days when people used to bank upon banks for the safety of their wealth – be it in the form of cash or any other form. The kind of financial reforms set in motion since National Democratic Alliance (NDA) took over reigns at the Centre, as debated for quite some time now, have been breeding fear among the general public. Latest move in the series is the Financial Resolution & Deposit Insurance (FRDI) Bill 2017 which is stated to be loaded with dangers for financial institutions like banks as well as the general customers of these institutions. 

As expected, anger against the FRDI Bill 2017 is gaining momentum across the country. Legal and financial experts are busy in analyzing the impact of the Bill on common bank customers once the Bill is enacted in the coming session of the Parliament. Currently the Bill is before the joint committee of Parliament. It has already triggered a hot debate about the safety of deposits made by customers in banks. The Clause 52 of the Bill envisages a ‘bail-in’ option which suggests that depositors’ money could be used by failing banks to cover their losses and stay in business. 

Let me reiterate, the FRDI Bill leads to a rescue operation of failed banks and other financial institution by setting up a Resolution Corporation. The Resolution Corporation will monitor the health of the financial entities like banks and in case of their failure; the newly created corporation will come into play to try and resolve the issues confronting them.

In view of the ‘anger’ brewing up across various circles in the country, which have seriously engaged themselves to educate common masses about the dangers in the Bill, union finance minister was forced to dispel fears of depositors over provisions of FRDI Bill and stated the government ‘will fully protect public deposits in financial institutions’. He even hinted at openness to changes in the proposed Bill.

It’s the ‘bail-in’ clause in the draft Bill that has become debatable and is believed by experts as a safe route carved by the government to lay hand on deposits, particularly those deposits that are in the form of savings accounts. What’s this ‘bail-in’ option which is so worrying? As already stated above, ‘bail-in’ essentially empowers the Resolution Corporation while taking the appropriate regulator on board, will take measures with respect to a specified financial institutions like banks to cover the losses incurred, or reasonably expected to be incurred, by the said institution. Precisely, a bank or any other financial entity suffering huge losses and on the verge of a collapse can be rescued through a bail-in. 

First let’s understand the word ‘bail-in’. We have oftenly come across the word bailout. In a bailout situation,  a failed banks is rescued by brining in money from outside of the institution. Here in ‘bail-in’ option, the internal structure of the financial institution suffering losses is restructured in a way to collect money within the institution to vover the losses. Notably, while exercising ‘bail-in’ option, the Resolution Corporation will lay hand on liabilities (deposits) of the financial entity to cover the losses and restart its business. 

It’s also to be understood that ‘bail-in’ in the proposed Bill has a clause which can prevent banks/financial institutions to pay a liability. By virtue of this clause the Corporation can modify or change the form of a liability owed by a bank or financial institution in crisis. So, more precisely, invoking ‘bail-in’ option can lead to cancellation of repayment of various kinds of deposits. The deposits in a failed financial entity can also be converted into long term bonds or equity. 

This means, the depositors will be forced into investment arena. Here it makes a sense to understand the world of bonds. What are bonds? Experts call a bond simply as an 'IOU' (I owe you) in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate for a pre-determined length of time. As far as investment in bonds is considered, it’s known as good as ploughing money with a lesser risk of losing it. They are considered a good investment avenue from a short-term perspective and safer than equities. If equities plummet, bond values aren’t necessarily adversely affected. We have mainly two types of bonds - Corporate bonds and Government bonds. 

Needless to mention that the safety issues of banks/financial institutions have its roots in their continued deteriorating health owing to burgeoning non-performing assets (NPA) accumulated by them quarter-after-quarter. 


(The views are of the author and not that of the institution he works for)