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No Fear No Favour

Ahead of government push for amendments in FRDI bill, here’s all you need to know about controversial bill

As the government faces flak on one of the most controversial bill after the Finance Bill which became a reality in March last year, the government is now seen on a backfoot on Finance Resolution and Deposit Insurance Bill (FRDI), and considered to tweak a few rules on the “bail-in” clause of the bill to please both the opposition and the citizens. But, how safe is our money in banks is something that needs a lot more attention and research.

So what’s all that fuss about “bail-in” clause?

Bail-in is what the Bail-out clause has. In the bail-in clause, instead of external agencies, typically government’s uses taxpayer’s money to rescue a financial institution in case of bankruptcy, creditors and depositors take a loss on their holdings. The bail-in clause of the FRDI bill gives tremendous power to the banks to convert your deposited money into long-term securities.

So, what are the amendments?

The first amendment that government is planning to introduce is that of the insurance cover. The bill replaces the Deposit Insurance and Credit Guarantee Corporation (DICGC) and takes up the current insurance amount from Rs 1 Lakh to Rs 5 Lakh. This means that if the bank ever goes bankrupt, the depositor’s money will be used to revive the entity after they were given back Rs 5 Lakh. The government take on the issue is that the deposit money shall be used in the “rare case” of a bank failure and in “rarest of rare case” to introduce “bail-in”.

Though it sounds like a good thing, it’s not.

You might be thinking that as now the government has increased the insured amount, it’s a good thing. But it’s not.

The Rs 1 Lakh insurance cover was in 1993 and hasn’t seen the change since then. Twenty-five years ago, 90% of bank accounts have Rs 1 Lakh or less hence, most of the depositor’s money was insured. But as of March 2016, the number of bank accounts with Rs 1 lakh or less has fallen to 67%; 97% of the deposit accounts had Rs 15 lakh or less – amounting to 45% of the total deposits by value in the banking system. An analysis by The Economic Times shows that if we were to adjust the insurance amount to inflation since ’93, the threshold should go up to at least Rs 15 lakh.

RBI data shows that as of March 2017, only 30% of the outstanding deposits by value (an outstanding deposit is a deposit that has been made in the bank but not yet recorded it), totalling to about Rs 30 lakh crore was insured.

Another amendment says that the account with more than Rs 5 lakh will be automatically treated as “long-term” bonds. The government promises to pay the money back but the time has not been specified yet. So, imagine there is an emergency and a person wishes to withdraw her own money, she cannot as her money is stuck in “long-term” bonds.

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