The financial resolution and deposit insurance 2017

 

What is this bill about?

1. This bill is to protect consumers.
2. It is meant to safeguard consumers in the event of the failure of any bank or an insurance company.
3. The bill wants to make sure that a financial institution is solvent and has all the parameters in it’s favour for  remaining solvent on an ongoing basis. The bill wants to ensure that there is no lurking risk within the operations of a financial institution.
4. As for this bill, financial institutions shall be categorized into five levels of risk
5. And accordingly action will be taken by the resolution corporation created by this bill.
   • low, where the probability of failure of a specified service provider is
   • substantially below the acceptable probability of failure;
   • moderate, where the probability of failure of a specified service provider is marginally below or equal to acceptable probability offailure;
   • material, where the probability of failure of a specified service provider is
   • marginally above acceptable probability of failure;
   • imminent, where the probability of failure of a specified service provider is substantially above the acceptable probability of failure
   • critical, where the probability of failure of a specified service provider.
   • substantially above the acceptable probability of failure, and the specified service provider is on the verge of failing to meet its obligations to its consumers
6. An important question arises on my mind, on the fact that why is this even necessary. We have the RBI & SEBI to take care of things. Why is another resolution Corporation being formed? Perhaps risk increases as financial institutions are created and business expands. We are a large country and as more and more people come under the umbrella of financial inclusion, the need to regulate control and administer certain situations becomes even more critical.

So then what is there to worry about? Why are the consumers in panic? What are the powers this corporation will have as a result of this bill?

1. The powers are vast and comprehensive.
2. Provide deposit insurance
3. Specify the classification for the category of risk
4. Act as an administrator
5. Act as a mediator and problem solver
6. Act as liquidator, take charge, merge,  amalgamate, transfer assets
7. Ask for the books of accounts and all related documents

So we understand that the powers are extremely wide. How does this impact on day-to-day life of consumers? Is there really are a reason to be worried? Is all the panic justified?

The panic is because of certain powers vested in the act viz;

1. The power to restrain business activity of the financial services provider.
2. The power to restrain employees to do their duty and act according to their job.
3. The power to impound, seize and freeze. Assets can be frozen and the activities of the financial institution be completely controlled and even suspended if the need arises.
4. But all of this is only relating to the specific violation that has been committed by the financial services provider under this act. It is not at random nor is it at the whim and fancy of the government.

What is this bail-in provision?

1. Let us also understand bail in provisions which is making a lot of noise.
2. These provisions allow financial institution to cancel or modify any liability or contract that it has. So to that extent consumers have a reason to worry. A bank is also a company and so if a company is going to fail; it will fail. That is a known fact. There is nothing new about this. Just that this is in the limelight and is being talked about everywhere.
3. The bail in provision and this whole bill talks about how the financial institution should go about doing things if such a situation were to arise.
4. This bill is putting a process to activities of financial institutions, which are now exposed to much larger risks such as NPA’s (Non Performing Assets) being the most obvious one and in future others such as natural calamities, climate related, global events & political risks.
5. However consumers are protected by the deposit insurance scheme to the extent allowed by the scheme, which is Rs. 1 lakh.
6. Infact by virtue of this act the resolution corporation will have the freedom to determine if a higher limit may be sanctioned for such deposit insurance schemes.

Are depositors at risk? Please clarify.

1. Depositors are covered by the deposit insurance. THERE IS NO CHANGE TO THAT. It is Rs. 1 lakhs per pan number.
2. Let me elaborate here; EVEN TODAY THERE IS NO GREAT PROTECTION TO ANY DEPOSITOR. Even today all your money in the bank, comprising of fixed deposits, savings account, current account etc, all together is protected by an insurance of just Rs. 1 lakh. This is mapped via your PAN number. This is as per the provisions of the deposit insurance and credit guarantee corporation act 1961.
3. So even in today’s scenario as consumers of Indian banking sector, we have practically no protection.
4. Hence if a bank, like any other company, is going to go bankrupt we will not even know until it actually happens; leave along being able to do something about it.
5. Therefore, holding assets with the banking sector and the risk of the banking sector getting affected due to business or economic environment or due to any other reason is there, risk was always there and risk will continue to be there. This bill is trying to identify such risk much in advance of any adverse happening, so in a way we as consumers should view this bill as something which is done for our benefit and to protect our assets in the banking system against any risk which is imminent or dormant.

So why penalize consumers? Is there a possibility of this happening?  What are some of the violations that Financial services providers might do?

Let us get this thing absolutely clear.  The government is not here to rob your property.  Let us not over react.

List of violations include;

(a) adequacy of capital, assets and liability;(b) asset quality;

(c) capability of management;

(d) earnings sufficiency;

(e) leverage ratio;

(f) liquidity of the specified service provider;

(g) sensitivity of the specified service provider to adverse market conditions;

(h) compliance with applicable laws;

(i) risk of failure of a holding company of a specified service provider or a connected body corporate in India or abroad; and

(j) any other attributes as the Corporation deems necessary:

These are not things that will affect consumers on day to day basis.  And if something has to go wrong it would have gone wrong long before the consumers at large would even more about. Eg. Global Trust Bank, Kapol Bank etc.

What might be some other solution if you just want to play a really safe?

Come back to the principles of good money-management.

1. It is not wise to keep money in the bank in savings account that give measly interest. It is not wise to give money in current accounts as you get nothing. It is not wise to keep money in fixed deposits as they give you really low returns, it is fully taxable and where you have much better options otherwise.
2. It is time to learn that banking is meant for facilitation of trade and exchange of money for goods and services. It is not available be an investment vehicle any more.