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FRDI Bill 2017: Banks to bear higher deposit insurance cost

 Anand Adhikari        Last Updated: December 12, 2017  | 13:12 IST

Banks to bear higher deposit insurance cost

Finance Minister Arun Jaitley has allayed the concerns over FDRI Bill, saying that the government will fully protect public deposits in financial institutions. The FRDI Bill proposes to create a framework for overseeing financial institutions such as banks, insurance companies, non-banking financial services (NBFC) companies and stock exchanges in case of insolvency. The FDRI Bill 2017, first introduced in the Lok Sabha in August this year, is currently undergoing scrutiny by a joint parliamentary committee. The 'Resolution Corporation', as proposed in the draft bill, would look after the process and prevent the banks from going bankrupt.

The finance minister said the government's plan of a massive Rs. 2.11 lakh crore capital infusion in banks was to strengthen banks and there was no question of any lender failing. If any such situation arises, the government will "fully protect" the deposits made by customers, the finance minister said, adding that "the government is very clear about it".

Mr Jaitley said rumours are being spread about the provisions of the bill. "The government has already clarified and said it is committed to strengthen PSU banks and financial institutions. About Rs. 2.11 lakh crore is being pumped in to strengthen the public sector banks."

At present, all deposits up to Rs. 1 lakh are protected under the Deposit Insurance and Credit Guarantee Corporation Act.

Last week, the finance ministry said that the FRDI Bill is depositor-friendly and provides more protection to them compared to existing provisions. The statement comes in the wake of "certain misgivings" that appeared in some reports about 'bail-in' provisions of the FDRI Bill. The provisions in the FRDI Bill do not modify current protections for depositors adversely at all, the ministry held, maintaining that these rather provide additional protections in a more transparent manner.

"The FRDI Bill is far more depositor friendly than many other jurisdictions, which provide for statutory bail-in, where consent of creditors or depositors is not required for bail-in," it added.

When it rains, it pours. The old adage seems so true for the pin stripped bankers. The digitization threat from Fintechs is already costing them a bomb. The deteriorating asset quality has almost made (at least some of) them penniless. The schemes like Jan Dhan (zero balance account) are adding to their cost woes. And if that was not enough, the controversy over the new Financial Resolution Deposit Insurance Bill for not specifying the deposit insurance amount has created yet another room for bankers to bear higher cost.

If initial reports from Finance Ministry is to be believed, the deposit insurance amount under the new bill would be higher than the existing Rs 1 lakh amount. The banks are likely to bear a higher burden of the deposit insurance if the government and the Reserve Bank of India (RBI) decides to hike the deposit insurance limit from the existing Rs 1 lakh under the new Financial Resolution Deposit Insurance Bill 2017.

Each deposit (savings, current, recurring and fixed deposits) is insured up to a maximum of Rs 1 lakh with the Deposit Insurance and Credit Guarantee Corporation (DIGC). The deposit insurance premium is paid by the banks to the DIGC. Under the existing framework, the DIGC charges 10 paise per Rs 100 deposit. So for a Rs 1,00,000 deposit, the premium charges are Rs 100 per annum.

There are reports that government is considering hiking the insured limit from Rs 1 lakh. "Any hike in the insured deposit amount will be at a cost to the banking industry," says a banker. The new Financial Resolution Deposit Insurance Bill 2017 doesn't make any mention of maximum deposit amount to be insured. The bill says that the government in consultation with regulator (RBI) will specify the total amount payable by the corporation with respect to any depositor.

Experts say the insurance premium under the new market driven bankruptcy of banks and financial institutions should be higher than 10 paise per Rs 100 because the probability of a bank failure is higher as there is a no bail out by government. Secondly, the banks are now much more vulnerable because of competition, digitization, cyber security risks etc. The insurance rates haven't been revised since April 2005.

It may be pointed out that the government has come out with an institutional framework for dealing with bankruptcy of banks and insurance companies. This new framework would be something akin to newly operational bankruptcy code for corporate sector, which is currently facing teething problems. The new corporation will to deal with financial institutions which are on the verge of a collapse, work out a resolution plan by way of restructuring, merger, acquisition or eventual liquidation in a worst case scenario.

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