FRDI being brought in to reverse nationalisation of banks

The Modi government at the Centre has planned for another note ban. And this note ban will not be on the cash kept in your home but on the money you have deposited in the banks. To explain things simply, if you have kept your entire savings in the banks and you go there to withdraw it at the hour of need, the bank will hand over a paper to you, saying that you will get the bank’s share in place of the cash. How will you feel then?

Yes, the Modi government was trying to get this kind of a bill passed during the winter session of Parliament, but it has now been deferred to the Budget session. This act is called Financial Resolution and Deposit Insurance (FRDI) Bill. The government had presented this bill in Parliament during the Monsoon session, which was then sent to the Joint Parliament Committee. If the Committee gives its recommendations on the Bill, then it may get approved during the Budget session and can then be implemented.

The Bill has been termed as a second and permanent note ban in the discussions it has sparked off. It is being said that if this Bill gets approved, then the Banks will have this right to save themselves from bankruptcy by using the money deposited in their accounts. In this way the bank will keep your entire savings and if it considers it right then it will hand over some of its shares to you in exchange.

Let’s first understand what FRDI Bill is:

Finance Minister Arun Jaitley first mentioned it in his speech while presenting the 2016-17 Budget. According to the Finance Ministry, this Bill will aim at protecting the banks and its customers’ interests in case of any financial crisis. The main points of this Bill are:

1. After the Bill gets approved, a resolution corporation will be formed.
2. If the bank starts incurring losses and its financial situation starts getting dimmer, then resolution corporation would protect its deposited amounts to a predetermined limit. However, the Bill which was scheduled to be presented during the Winter Session is not very clear in this regard.
3. If any financial institution, including all the banks, insurance companies, and other financial institutions are declared to be in crisis for any reason, the resolution corporation will take over its financial management and will try to bail it out.
4. If a bank or any other financial institution starts sinking in a financial crisis, then the bank or the institution will decide on its own how it will use its customers’ money for this bail-out.

Whatever rules we have at present have the provision that if a bank becomes bankrupt then it is the bank’s responsibility to return to the customer at least Rs one lakh of his deposited money. For example, if a bank is declared bankrupt and you have deposited Rs two lakh in the bank, then you will surely get one lakh rupees back.

But, if the FRDI Bill gets passed, this rule automatically will turn null and void. And the guarantee of getting at least one lakh rupees back will also end. Experts believe that people will lose trust on the banks if this Bill gets passed. In a way it will be a permanent note ban, in which you will be deprived of your own money deposited in the bank.

One provision of the Bill has caused experts to conclude this. In simple words, this provision is that banks will use their depositors’money to bail themselves out of any financial crisis. Another explanation of this bail-out provision is that the government may keep depositors’ money for some time. That means a more frightening situation will emerge if this provision of the Bill is implemented, than the situation during demonetisation when your cash savings were destroyed and a limit was clamped on withdrawing your own money from the banks, because the banks and the government then will have a right to refuse to give you your own money.

Due to these apprehensions regarding this bail-out provision of the Bill, the government had tried to justify it recently. Last Thursday, the Finance ministry said in a statement, “There are some doubts in media regarding Bail-out provision, Extra protection and transparency has been introduced in the provision concerning the depositors’ money.”

Finance Minister Arun Jaitley said in a tweet:

But the more serious problem is that after the FRDI law is implemented, the present law, Deposit Insurance and Credit Guarantee Corporation Act would be rendered ineffective. Under this law, the customers’ deposited money stand a guarantee of being returned. And the country’s present banking system is considered credible and secure because of this law only.

Then why is the government keen on bringing such a law which will lead people to lose trust on the banking system? The government argues that through the new law, a new structure would be prepared for tackling the problem of bankruptcy of private banks, insurance companies and other financial institutions. The Centre also claims after the approval of foreign investment in banking and insolvency code and recapitalisation plan of nationalised banks, the new law will prove to be a historical reform in the financial sector.

But the government’s logic raises another doubt. If a bank, engulfed in a financial crisis, gives you its share instead of your money, then what will be the share’s price in the market? What will be the available option for customers in such a situation? In fact, the real game is hidden in this option.

A customer withdraws his money from the bank only in case of necessity. In the hour of need, if you are given a share instead of money, you will naturally sell it in the market to get some money. At that time, big corporates and other private players in the market will buy that share from you and in this manner the ownership of banks will pass into the hands of private players without any legal interference. And the main objective of strengthening banking system by nationalising banks will vanish into thin air.

Although Prime Minister Narendra Modi and his government are trying hard to clear people’s doubts regarding the FRDI Bill, but a common man’s anxiety is increasing gradually. Not only this, the corporate world also has shown concerns over this provision of the Bail-out and has demanded for it to be changed. According to agency reports, the Associated Chambers of Commerce & Industry of India, ASSOCHAM, has also issued a statement demanding a change in this provision.

ASSOCHAM has said that the sub section7 of the section 52 of the proposed law clearly says that this provision will not be limited to the amount the government or the bank has given a guarantee of.” ASSOCHAM secretary DS Rawat believes that depositors’ money should be protected by removing the bail-out clause in any case.