There is a lot of noise on Social Media on the safety of your bank deposit post the FRDI bill becomes an Act. This bill is debated a lot because it directly impacts the 2 pillars of our lives – Banks & Savings. Today let’s try to find the answer to this buzzing question – Is my Bank Deposit Safe Under FRDI Bill? Or will it be worse than the present safety net?
In the act, the 2 words – “bail-in” & “Resolution Corporation” has created maximum doubts and controversies. Let us see what these words mean in the context of banks & our deposits.
But before we start let us see the present Safety Net.
Insurance of Deposits
Currently, DICGC (Deposit Insurance and Credit Guarantee Corporation) provides deposit insurance of up to Rs 5 lakh. Yes, only 5 Lakh and rest of amount are forfeited in the rare event of a bank failure.
(UPDATE on 02 Feb 2020: In Budget 2020, the FM announced that the limit is increased to Rs 500000/-. If the Finance Bill becomes Act, the limit will be Rs 5 lakhs from 04 Feb 2020) (Here is the notification)
But none of the bigger banks has failed in past. We have a strong system of rating by RBI where when there are any symptoms leading to future failure, the bank is notified and made to work on improving its condition.
If a bank fails to improve, it is taken over by a healthy bank. For Eg Global Trust Bank (GTB) was merged with Oriental Bank of Commerce (OBC).
DICGC charges a premium from the banks on the deposit it insures. This amount is fixed for all type of banks- healthy or sick.
Background of FRDI Bill
Now we discussed what will happen if Bank Fails. But what if say an financial crisis surfaces. It may lead to failure of one or more NBFC or an Insurance company or a pension company. Then what?
Consequent to the Union Budget 2016-17 announcement, Finance Minister formed a committee consists of members from various regulators like RBI, SEBI, IRDA, PFRDA to submit a Bill on the resolution of financial firms.
The Committee submitted a draft Bill named as “The Financial Resolution and Deposit Insurance (FRDI) Bill”. In line with the Insolvency and Bankruptcy Code, the FRDI Bill, 2017 was introduced in Lok Sabha on August 10, 2017, to deal with the financial firms/companies.
Financial firms include banks, non-banking financial companies (NBFCs), insurance companies, pensions funds, stock exchanges, and depositories.
What is Resolution Corporation?
The Bill seeks to establish a ‘Resolution Corporation’ to monitor financial firms (along with regulators), and resolve them in case of failure.
We all know what happened to the US in 2007 & 2008. Large banks, lending companies were on verge of failure and no one was ready to buy them. The government had to intervene and bail them or hand over to strong companies. 
To prevent such situation in India, the corporation will keep an eye on the financial firms by noting their liabilities. They will also rank institution in terms of their financial health.
Same way Mutual Funds or companies are rating by various credit rating agencies.
RC, just like DICGC, will insure the prevailing Rs 5 Lakh (or more in consultation with RBI). So the DICGC will be part of RC under this bill.
As per the bill, any failure may be resolved by mergers and acquisitions, transferring its assets (This is Bail-in… Details below) and liabilities, or reducing its debt. (This happens today also by RBI interventions. But the bill will cover all financial firms)
Finally, If the resolution is found unviable, the firm/bank may be liquidated, and its assets sold to repay the different stakeholders.
So, in the present, if a bank fails investor is safe with Rs 5 Lakh and after that, it is forfeited. But under Resolution Corporation and its guidelines a banks assets will be sold and repaid back to investors.
What is Bail-in?
The Bail-in clause means the firm or the bank while working on its health a distressed bank or firm can issue securities (Bonds or Shares) till it is in the position of repaying the deposit.
It means, in case the firm’s financial situation deteriorates, deposits could be converted into securities such as shares in the bank.
So suppose XYZ Bank is not healthy. So in place of repaying your deposit it may give you 5 year bonds say on 7% interest. Or it may issue you shares, which you can sell in the market or hold as investment.
Bail-in strategy would help to mitigate the systemic risks associated with disorderly liquidations, reduce deleveraging pressures, and preserve asset values that might otherwise be lost in a liquidation.
So, instead of liquidation and long procedure the payment is converted to security and this could be used by the investor to invest further or sell to get his/her money back. The investor will not have to wait through liquidation process which may take years.
What is the Risk the bank is facing currently?
In India out of the term (fixed) deposits accounts, 67% of the total accounts are of less than Rs 1 lakh. These holders just hold 8.6% of the total Indian Fixed Deposit amount in terms of value.
Thus, even if any banks ever hypothetically fail, then it would not affect the small depositors at all, as it is covered by insurance.
In the Bill, it has also been proposed that financial firms in India will be classified into five categories based on their risk profile.
So, you will know whether your money is with a “safe” bank or firm.
Also, this will clearly incentivize the higher risk banks to improve their risk profile. Currently, they are paying a higher premium on their deposits to DICGC. Once ranking is done, the high-rank bank will pay less in comparison to weak banks. Banks profitability will increase with this measure.
Is my Bank Deposit Safe Under FRDI Bill?
Bail-in is only applicable when you sign will making the deposit that you consent to it. Otherwise, you will be out of this clause. Without consent your deposit will be secured by Rs 5 Lakh. The amount may increase as the bill has provision to align this with other developed nations.
So fear of losing your money is baseless.
In fact, when you participate, you have better chances of getting your amount faster and fully. Hope this answers Is my Bank Deposit Safe Under FRDI Bill?
Also, Resolution Corporation will act as the first wall against any weakness the institution is facing. It will act on your side by issuing proper signals & resolutions to treat an ailing firm or a bank.
Final Words,
Time has changed at a neck-breaking pace. The number of financial firms & their exposure to global products has increased risk.
These “new gen risks” need a new, sharp and time-bound rules to help and mitigate loss to common investors. So if FRDI is brought in the right spirit, we are on the right track.
Let me know your views on it. Political or a-political all views.
Share to resolve the doubt of – Is my Bank Deposit Safe Under FRDI Bill, from the minds of investors, family & friends around you.
I feel that it is a good step. For example if a bank is categorized in to high risk category, then people will get to know what banks they can trust also we can limit the deposits in those banks up to 1 lakh.
Yes bank rating will help in taking decisions. Only thing is as demand/supply rule goes, banks will high rating will pay less compared to moderate or low ranked banks. Good thing is investor will have choices. Thx for reading.. and keep commenting.