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Bank deposits are safe; proposed FRDI norms not to alter status quo

Author: Debasis Mohapatra/Friday, December 8, 2017/Categories: Government

Bank deposits are safe; proposed FRDI norms not to alter status quo

Mumbai, December 8 - Depositors’ money with the banks is safe as the proposed changes in the Financial Resolution and Deposit Insurance Bill (FRDI) will not put public funds under any kind of risk in case of insolvency, banking industry body said today.

The FRDI bill, which is currently under the consideration of Joint Committee of Parliament, has raised fears among depositors over the safety of their deposits due to some contentious provisions. For instance, the ‘bail-in’ provision seeks to allow the government to use depositors' money to save a bank in case of bankruptcy.

“The provisions of the bill have not been explained properly to general public. According to amendments of Banking Regulation Act, no banks will be allowed to be liquidated in India. Rather, they will be acquired or merged with another bank. This provision restricts liquidation of any bank and keeps depositors’ money safe,” General Secretary of All India Bank Employees' Association (AIBEA), C.H. Venkatachalam told the Finapolis on Friday.

The proposed FRDI bill is part of G20 convention, which India seeks to comply with, he added.

Meanwhile, Finance Ministry has also tried to allay concerns of depositors over the provisions of the bill. In a communication, "The provisions contained in the FRDI Bill, as introduced in the Parliament, do not modify present protections to the depositors adversely at all. They provide rather additional protections to the depositors in a more transparent manner," the Ministry said in a communiqué.

Currently, bank deposits are protected to a limit of Rs 1 lakh by the guarantee of Deposit Insurance and Credit Guarantee Corporation (DICGC). Any deposit above Rs 1 lakh is treated at par with claims of unsecured creditors. So, in case of liquidation of a bank, depositors’ money is only paid post all payment to preferential shareholders.

“The bill is ill-timed. In an environment, when general public is bombarded with the news of bad loan problem of banks with willful defaults by companies, they will definitely have concerns over possible insolvency of a bank,” Venkatachalam said.

However, Finance Ministry has already issued clarification on this matter saying the government's implicit guarantee for Public Sector Banks remains unaffected. It also said that banks have adequate capital and are also under prudent regulation and supervision to ensure systemic stability. 

Interestingly, clarification by the government has been issued after an online petition on Change.org went viral against the ‘bail-in’ clause of the FRDI Bill.

Notably, around 40% of the total deposit in the Indian banking system comes under Current Account, Savings Account (CASA) deposit and any change in norm will have huge impact on this cheap cost deposit base of banks.      

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