‘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)

 

Latest News

  1. Army man dies of cardiac arrest in north Kashmir
  2. Army man dies of cardiac arrest in north Kashmir
  1. Jammu and Kashmir: Army officer wounded in cross-LoC firing in Poonch
  2. Jammu and Kashmir: Army officer wounded in cross-LoC firing in Poonch
  1. Man arrested over murder of wife in south Kashmir: Police
  2. Man arrested over murder of wife in south Kashmir: Police
  1. Geelani condemns arrest of Bilal Kawa, says ‘Kashmiri youth implicated in false cases’
  2. Geelani condemns arrest of Bilal Kawa, says ‘Kashmiri youth implicated in false cases’
  1. Amnesty starts online and postcard campaign to petition Jammu and Kashmir CM for ban on pellets
  2. Amnesty starts online and postcard campaign to petition Jammu and Kashmir CM for ban on pellets
  1. Bijbehara shuts on maiden death anniversary of three Hizb militants
  2. Bijbehara shuts on maiden death anniversary of three Hizb militants
  1. Kashmir legislator Er Rasheed boycotts assembly, alleges beating by marshals, non-locals
  2. Kashmir legislator Er Rasheed boycotts assembly, alleges beating by marshals, non-locals
  1. 3,168 cases of crime against women registered in Jammu and Kashmir in 2017
  2. 3,168 cases of crime against women registered in Jammu and Kashmir in 2017
  1. 5,946 SPOs appointed in Jammu and Kashmir in 2017: Govt
  2. 5,946 SPOs appointed in Jammu and Kashmir in 2017: Govt
  1. Govt ends Haj subsidy from this year: Naqvi
  2. Govt ends Haj subsidy from this year: Naqvi
  1. Media persons stage walkout to protest deputy speaker's directive
  2. Media persons stage walkout to protest deputy speaker's directive
  1. JRL stages protest in Downtown Srinagar against rights violations, arrests
  2. JRL stages protest in Downtown Srinagar against rights violations, arrests
  1. Mehbooba Mufti chairs Unified High Command meeting in Jammu
  2. Mehbooba Mufti chairs Unified High Command meeting in Jammu
  1. Two injured in explosion at army’s Khundroo ammunition depot in south Kashmir
  2. Two injured in explosion at army’s Khundroo ammunition depot in south Kashmir
  1. History of referendum to be part of Goa school curriculum: CM
  2. History of referendum to be part of Goa school curriculum: CM
  1. Relatives of ‘murdered’ Sopore goldsmith protest against ‘failure’ to trace his body
  2. Relatives of ‘murdered’ Sopore goldsmith protest against ‘failure’ to trace his body
  1. Congress stages walkout from Jammu and Kashmir Assembly over Ladakh tourism projects demand
  2. Congress stages walkout from Jammu and Kashmir Assembly over Ladakh tourism projects demand
  1. People had come to kill me, claims Togadia
  2. People had come to kill me, claims Togadia
  1. Forces pay annual rent of Rs 12.38 crore for land occupied in Kashmir: Govt
  2. Forces pay annual rent of Rs 12.38 crore for land occupied in Kashmir: Govt
  1. Nawaz Sharif appears before accountability court for 13th time
  2. Nawaz Sharif appears before accountability court for 13th time
  1. Farmers body urges government to curb cigarette smuggling
  2. Farmers body urges government to curb cigarette smuggling
  1. Palestinian Central Council recommends suspending recognition of Israel
  2. Palestinian Central Council recommends suspending recognition of Israel
  1. Government forms committee to ‘examine' demands of protesting NHM employees
  2. Government forms committee to ‘examine' demands of protesting NHM employees
  1. Hit in the head, Pakistani cricketer Shoaib Malik shows symptoms of delayed concussion
  2. Hit in the head, Pakistani cricketer Shoaib Malik shows symptoms of delayed concussion
  1. Congress legislator accuses govt of making ‘unnecessary appointments’ in ‘defunct’ corporations
  2. Congress legislator accuses govt of making ‘unnecessary appointments’ in ‘defunct’ corporations
  1. Benjamin Netanyahu visits Taj Mahal
  2. Benjamin Netanyahu visits Taj Mahal
  1. Cold wave continues in Jammu and Kashmir, Kargil freezes at minus 19
  2. Cold wave continues in Jammu and Kashmir, Kargil freezes at minus 19
  1. Jammu and Kashmir minister offers to resign after allegations of corruption
  2. Jammu and Kashmir minister offers to resign after allegations of corruption
  1. Civilian injured in Shopian gunfight dies after 27 days
  2. Civilian injured in Shopian gunfight dies after 27 days
  1. NC, Congress boycott LC proceedings on second straight day; demand chairman’s apology
  2. NC, Congress boycott LC proceedings on second straight day; demand chairman’s apology
  1. Bilal Kawa arrest: Jammu and Kashmir govt afraid of Delhi, says Sagar
  2. Bilal Kawa arrest: Jammu and Kashmir govt afraid of Delhi, says Sagar
  1. Electrician found mysteriously dead in north Kashmir hospital
  2. Electrician found mysteriously dead in north Kashmir hospital
  1. Video | Uproar in assembly over arrest of Kashmiri businessman Bilal Kawa by Delhi Police
  2. Video | Uproar in assembly over arrest of Kashmiri businessman Bilal Kawa by Delhi Police