New Delhi: In his first address after the vitriolic election campaign in Gujarat, Prime Minister Narendra Modi on Wednesday blamed the previous Congress-led UPA government for creating the bad loans crisis plaguing banks today.
Speaking at the 90th AGM of industry association FICCI, the Prime Minister said the UPA “forced” banks to dole out loans worth thousands of crores of rupees to select industrialists, calling it a “bigger scam” than the 2G, coal and Commonwealth Games scams.
Modi said the non-performing asset (NPA) or bad loans problem is a “liability” handed over by “economists” in the previous regime. He added that the loans extended to select industrialists by pressuring banks was a “loot” of public money.
Modi also sought to allay the fears of bank account holders, saying their deposits in banks will be safe and their interests would not be harmed in any way.
He added that rumours were being spread by “some sections” about provisions of the proposed Financial Regulation and Deposit Insurance (FRDI) Bill.
"The government is trying to strengthen the banking system by policy initiatives on a daily basis. But on social media rumours are being spread about the FRDI Bill, which is completely opposite to the reality. We are trying to protect the depositors interest and the banks as well," Modi said.
Indian banks have a cumulative $154 million worth of non-performing assets.
Opposition leaders had accused the Modi government of making savings in bank accounts unsafe by allowing banks to use the deposits for recapitalization in case of a financial setback.
The national bank employee unions' threat to go on strike has added to the panic.
It was during Parliament’s Monsoon Session that the Financial Resolution and Deposit Insurance (FRDI) Bill was introduced and has gone through rigorous public debates since then.
A joint parliamentary committee is currently studying the draft Bill and is expected to come out with a report, following which it is likely to be taken up for legislative approval in Parliament.
However, the concerns of consumers and bank employees have raised some pertinent questions.
Banks have, forever, been known to be cornerstones of financial security. But with the current Bill in contention, several bank employees, on condition of anonymity, said that “the very foundation of financial security is being questioned”.
The bill provides for a bail-in option, which means depositors could lose control of their money which would be converted into securities such as shares in the bank in case the bank’s financial situation deteriorates. Simply put, banks will be using depositor’s money to recoup.
“The bill has it that banks in case of a financial breakdown can use depositor’s money to re-strengthen themselves and the cash will be converted into securities that can later be monetized. However, what if the bank never recovers?” said DK Srivastava, chief policy advisor at EY, a consultancy firm.
Banking unions have also opposed this bill for a variety of reasons. The unions said in a joint statement in November that “the proposed law will open up public sector banks for liquidation or amalgamation, which could put the deposits of customers under severe risk. Worse, provisions dealing with deposit insurance are ambiguous in the draft law, with no explanation on the amount to be insured by the banks.”
Under the current law, deposits of up to Rs 1 lakh, including interest, are protected by the insurance cover that the bank provides. This means that payment of deposits up to Rs 1 lakh is guaranteed even if the bank sinks. Anything over and above Rs 1 lakh does not have this protection, which means there is a possibility that a bank account holder with a large deposit might lose a lot of money if a bank cripples.
However, this has never happened since 1961.
Finance Minister Arun Jaitley, in his last budget speech, had said, “The government is keen on setting up a framework that would instil better financial discipline among banking institutions and make stronger provisions to protect public money.”
Following the announcement, a committee under Ajay Tyagi, additional secretary of the Department of Economic Affairs, was set up in March last year. The committee released the draft law in September 2016. The Union Cabinet cleared the Bill in June this year, which was later tabled in Parliament in August.
Political parties, including the Congress and the Trinamool Congress, have gone whole hog in refuting the Bill, citing public money risks involved in operationalising it.
Arun Jaitley, faced with resistance, said in a press conference on Tuesday that public money will be protected and depositors need not worry.
The Bail-in Clause
The bail-in clause included in the proposed law is one provision that directly and immediately affects depositors.
According to the clause, creditors of the bank would have to bear a part of the loss in case the financial institution sinks. All depositors are considered creditors in banking terms.
Abhishek Poddar, Partner A T Kearney, feels this is perhaps an improvement on the existing scenario, where amounts over Rs 1 lakh would be lost completely. “Your money will be converted into a security instead of being lost,” said Poddar.
Those opposing the new law argue that its fundamental idea is to transfer the burden of non-performing assets created by corporate defaulters to the common people.
“It is fairly deducible that the corporate defaulters will be eased off only to pass on the burden to the depositors,” added Srivastava.
The banking sector is under stress due to bad loans and according to the RBI's Financial Stability Report released in June 2017, the gross non-performing advances (GNPAs) ratio of all banks stood at 9.6% as of March 2017. The RBI had recommended that banks initiate insolvency proceedings for 12 large defaulters, constituting 25% of the system’s NPAs.
While the provisions of the Bill ensure stability in the financial sector and resolution of issues in a time-bound manner, interests of bank depositors sure need a revisit.
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