Bail-in: Here’s why SBI report says small depositors have nothing to worry about


There has been considerable disquiet over the draft Financial Resolution and Deposit Insurance (FRDI) Bill. Industry chamber Assocham has also jumped into the ‘bail-in’ debate on FRDI, cautioning the government that the trust in the banking system runs the risk of being eroded if the clause is not done away with.

The industry body, however, seems to be speaking in a different voice than the captains of the banking industry. In a recent banking conference, CEOs of some of the top banks in the country assured people that deposits were not threatened by the new FRDI Bill, as it was an improvement over the present system.

In fact, a report by Soumya Kanti Ghosh, Chief Economic Adviser, SBI has said that the FRDI Bill will be a win-win for all.

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In a report titled ‘Some Fallacies Regarding FRDI’ Ghosh toes the government line saying that the FRDI Bill in India would be more depositor-friendly than many other jurisdictions around the world.

The report goes on the say that the statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed firm. The 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. Ghosh says that India’s bail-in is similar to the strategies adopted by EU countries like Cyprus and Greece.

Commenting on India’s bail-in, the report says that the risk is less in the proposed bill. Currently, Deposit Insurance and Credit Guarantee Corporation (DICGC) provides deposit insurance of up to Rs 1 lakh and rest of amount is forfeited in the event of a bank failure. While the FRDI Bill has not specified the insured amount yet, it would definitely be higher than the current limit of Rs 1 lakh.

It is also likely because the amount insured has moved up from Rs 1,500 in 1962 to Rs 1 lakh in 1993 but since then there has been no change, despite a sharp rise in deposits.

Ghosh uses data on Cross Country Deposit insurance coverage limit to prove his point. The data shows that deposit insurance coverage in India is one of the lowest at USD 1,508 as compared to a per capita income of USD 1,709. The coverage of 0.9 times is much lower than 7.4 times provided in Brazil and 2.2 times in Russia.

In India, says the report, around 67 percent of all term deposits are less than Rs 1 lakh. These deposits account for 8.6 percent of all deposits. In other words, the smaller depositors will not be affected in case of a bank going under. The bulk of the deposits in value terms – around 55 percent — are those that are held by high-value depositors in the range of Rs 15 lakh and above. In number terms, these accounts are only 1.3 percent of all term deposits.

The FRDI Bill establishes a Resolution Corporation which will monitor the financial firms such as banks, insurance companies, stock exchanges, and depositories and pre-empt their failure, and resolve or liquidate them in case of failure.

During volatile times as is the present case, all financial asset classes are interlinked not only in India but globally; the bill helps address an important risk and timely intervention can help prevent the risk from spreading.