There are growing fears that the Financial Resolution and Deposit Insurance Bill Bill 2017 (FRDI) will result in people losing their hard earned money in case a bank fails.
The bill has caused alarm over a bail-in provision which according to many may mean creditors and depositors including common account holders have to absorb losses in case a ban fails.
The Bill was presented in the Lok Sabha in August before it was referred to a joint committee of Parliament. Under the bail-in provision, troubled banks issue ties in lieu of the money deposited. There have been instances to show that in other countries that depositors have lost money after the bail-in provision was introduced. For example in Cyprus depositors lost almost 50 per cent of their savings when this provision was introduced.
Many have gone on to term this Bill as anti-poor and is aimed at minimalising the losses of the financial institutions.
The Finance Ministry has however decided to clear the air on the issue. The government's implicit guarantee for public sector banks remains unaffected.
The bill does not propose to limit the scope of powers for the government to extend financing and resolution support to banks, including public sector banks. 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 additional protections to the depositors in a more transparent manner," the ministry said in a statement.
Currently, under the Deposit Insurance and Credit Guarantee Corporation Act, 1961, a maximum of Rs 1 lakh of every depositor in banks is insured in case a bank goes bust.
The FRDI proposes a "resolution corporation" which, in association with a regulator, will determine the amount of money of depositors to be insured in case a bank fails. The bill says that the provision of bail-in will not be applicable to "any liability owed by a specified service provider to the depositors to the extent such deposits are covered by deposit insurance".
The Finance Ministry, however, said that Billi's far depositor friendly when compared to other countries which provide for statutory bail-in without the consent of creditors and depositors.
"Indian Banks have adequate capital and are also under prudent regulation and supervision to ensure safety and soundness, as well as systemic stability. The existing laws ensure the integrity, security and safety of the banking system," said the ministry.
"The bill ensures that, in the rare event of failure of a financial service provider, there is a system of quick, orderly and efficient resolution in favour of depositors," the Finance Ministry also added.