Shankkar aiyAr Author of Aadhaar: A Biometric History of India’s 12 Digit Revolution,
and Accidental India
Useful Idiots! The coinage, frequently attributed to Vladimir Lenin, is used to describe the gullible. The constituency of useful idiots, it would seem, is being expanded to include a new constituent — depositors who park their money in banks. The government has introduced the ‘Financial Resolution and Deposit Insurance Bill, 2017’ (FRDI) in parliament. The bill aims to establish a Resolution Corporation and define processes to anticipate risk of failure in financial entities and resolve them. The preamble also promises “protection of consumers of specified service providers and public funds”.
The bill has sent shivers up collective spines. Clause 52 empowers the Resolution Corporation “to bail-in a specified service provider to absorb the losses incurred”. Under this provision the Corporation can cancel a liability, modify or change the form of liability, convert an instrument from one class to another, replace an instrument with another, create a new security and enforce haircuts. In essence, when a bank poses a systemic risk, the Corporation can cancel repayment of deposits, convert deposits into long-term bonds or equity and enforce haircuts to whoever the bank owes monies.
Unsurprisingly, it has triggered outrage and binary discourse — charges of impending disaster versus accusations of fear mongering. Fear though is real — about what is stated and what is yet unstated. Thus far depositors believed keeping money in banks is risk-free. This belief rests on an explicit and an implicit guarantee — deposit insurance and faith in sovereign intervention. The FRDI bill has unsettled trust in both the explicit and the implicit.
The bill in its current form allows liabilities (including deposits) to be corralled to mitigate failure. Yes, it exempts deposits covered by insurance — currently at `1 lakh since 1993 versus $250,000 in the US. The quantum of deposit insurance is yet to be arrived at and the qualifying conditions are yet unknown. Clearly, deposit insurance will be limited.
The potential for trauma is unlimited — savings for retirement, marriage, education, house, taxes et al could exceed deposit insurance. There is also the systemic risk to businesses and jobs if salary accounts of SMEs and working capital gets blocked. Anxiety is fuelled by gaps in the bill and the timing — the banking sector is still wrestling with about `9 trillion of bad loans, the bulk of which is in the books of public sector banks.
WhatsAppically, the bill is the brain-child of this regime. Factually, bail-in owes its genesis to the financial crisis of 2008. In November that year, the G20, of which India is a member, met in Washington and resolved to strengthen global financial architecture, and expanded the Financial Stability Forum to create the Financial Stability Board (FSB). The concept of ‘bail-in’ made its appearance in a consultative paper of the FSB in July 2011. The proposal (echoed in a RBI report of May 2014) was ratified at the Brisbane G20 in November 2014. The bill was introduced in August 2017.
Too often in India the discourse on the political economy focuses on the ‘who’ rather than the why of what is being proposed. The logic behind the FSB proposal that “public bail-outs placed taxpayer funds at unacceptable risks and has increased moral hazard” is problematic — and the redressal mechanism itself could be hazardous. The focus on consequence distracts from the evasion of accountability of regulators and governments.
The fundamental question is: Must the individual, providing low cost capital to banks, be coerced to pay the price of institutional failures, which could occur due to demographic, geopolitical, technological disruptions, or simply the complexities of scale that globalisation entails? Yes, the tax payer is innocent, but so is the depositor Joe — who can only diddle when the bankers/players fiddle.
The incapacity of depositors is heightened when juxtaposed in the Indian context and experience. Indian banks hold over `105 trillion or `105 lakh crore worth of deposits — 70-plus per cent in public sector banks. The government has historically and even now deployed banks as an instrument of social change. These, justified as they may be, impose costs on the balance sheet of the banks.
The depositor has no control over an array of factors. Gross NPAs shot up due to a variety of reasons, including corrupt corporate-banker nexus, systemic sloth that delays projects or plain policy paralysis. Then there are events — loan waivers, restructuring of SEB loans, judicial orders about cancellation of coal/telecom licences. And finally, there is the issue of political management of public sector financial institutions. S/he can scarcely change or challenge the action or the actors. Yet, the FSB proposal and the FRDI bill seek to pin the bill for resolution on the depositor.
The government has belatedly clarified that depositors will be protected and asserted that “Government’s implicit guarantee for Public Sector Banks remains unaffected”. The assurance of implicit guarantee though is tested by explicit provisions in the bill. The question is whether the cost of systemic failure has been shifted from the government and the tax payer to depositor or not. And what about those keeping money in private banks?
Context is critical for any policy formulation, particluarly when government is the biggest banker. Those in Europe can move class action suits, whereas in India redressal of ordinary grievances is a struggle.
In July 2017, the FSB released its review of 10 years of post-crisis reforms and status of implementation by member countries. Of the 24 members, 13 countries — including Australia, China, Brazil, Russia, South Africa and Indonesia — are yet to induct laws for ‘bail-in’. Must India rush in where other countries fear to tread? shankkar.aiyar@gmail.com