Random Reflections - 14                                                                                                      28.09.2017 

Why Govt wants to liquidate Financial Institutions ? 

Under the FRDI bill 2017, a “Resolution Corporation” would be established with only government nominees on its board; the board would have sweeping powers to order amalgamation, merger, liquidation and acquisition of any bank, including the SBI and other nationalised banks, regional rural banks, co-operative banks and payment banks, any insurance company including the LIC and other nationalised general insurance companies and any non-banking financial institution if, in its opinion and judgement, the concerned institution (bank or insurance company) has got “imminent” or “critical” risk to viability. The Corporation will also be authorised to hand over any such institution to another entity – public or private. The Corporation has been authorised to order discontinuation of service of the employees and officers and/or transfer of their employment and/or reduction of their remuneration upon such “Resolution”, i.e. amalgamation and/or merger and/or liquidation and/or transfer of ownership. The bill has the following draconian provisions:

Amendment to all Acts related to the Financial Sector

FRDI envisages forthwith closure of the “Deposit Insurance and Credit Guarantee Corporation” (DICGC) established in 1961, which has so far been an insurance cover for the savings of the depositors; under the FRDI, deposits upto a maximum of Rupees One Lakh only will be returned to each depositor and that too in instalments as per convenience and discretion of the “Resolution Corporation” to be established.

Ø  A Corporate body called ‘Financial Resolution Corporation(FRC)’ will be formed.

Ø  DICGC will be merged with the FRC.

Ø  A Board will be established with

o   a Chairperson,

o   4 members - one each from Finance Ministry, RBI, SEBI, IRDA, PFRDA,

o   3 whole time members appointed by Govt. &

o   2 Independent members appointed by Govt.

Ø  The Govt. will have power to remove all of them and they are considered Independent!

In recent years, the unholy nexus between the unscrupulous corporate houses, top stratums of banks and a section of political bosses have successfully raised the level of NPAs by alarming proportions; the rate of growth of NPAs has increased several folds after the present NDA government assumed power at the centre in 2014. Of the total NPA portfolios of PSBs as at present, 88.4 per cent is the creation of the large corporate borrowers with the loan exposure of or above Rs 5 crores each;  of which, 25 per cent is accounted for by  12 large borrowers.

The present government at the centre has no political will to recover the NPAs from the defaulting corporates; instead, it is more interested to accommodate and patronise the defaulters through various measures like loan-restructuring, assets-reconstruction, insolvency and Bankruptcy codes and even write offs and outright loan-waiver and thereby it attempts to show the performance of the PSBs in poor light and then liquidate them through the new bill.

The draconian nature of the bill and its impact on the safety and security of people’s deposits as also that on the emoluments and the very job security of the employees and officers is apparent and manifest on the face of it; but the most dangerous consequence is that it will take out the issue of existence or liquidation of a PSB from the domain of public debate and leave it to the whims of bureaucratic dictates.  Let us discuss the serious issues on the Bill which is brought into create a Super Power than even CBI or Parliament. My comments on the bill are;

1.   Unconstitutional :

Any Act brought to the Parliament should be within the frame work of the Constitution. 

The preamble of the constitution talks about:

JUSTICE, social, economic and political;

EQUALITY of status and of opportunity;

And above all sovereignty

The proposed bill is discriminating between the depositor and the borrower, through its provisions of “Bail in”.  The depositor whose money is given as loan to the borrower is likely to lose his share of deposit in case of a Bail in, whereas the borrower who availed the loan is likely to go scot free.  Thus the Bail in concept is a double whammy.  In Cyprus the depositors lost almost 50% of their savings when a “bail in” was implemented by the resolution corporation which is similar to that of the FRDIC proposed in this Bill.  [A ‘bailout’ is where the Govt or the Central Bank of the country comes to the rescue whereas in “Bail in” the depositors money kept as deposit will be converted into Equity- thus the burden will be shifted to the poor depositor]

Constitution in Sec 13(2) says

“The State shall not make any law which takes away or abridges the rights conferred by this Part and any law made in contravention of this clause shall, to the extent of the contravention, be void.”

Here the Bill is taking away the rights of the depositor to get back what he deposited in full trust that his money is safe in a Public Sector Bank as it is backed by the sovereign guarantee of the country.

Similarly the proposed bill is also in contravention of Sec  14 under “Right to Equality”.

“The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India”, .  The bill is denying the rights of the depositor who would have deposited more than what is provided under the Deposit Insurance.  

The Constitution under Right to Constitutional Remedies provided under Sec 32 (4) says

“The right guaranteed by this article shall not be suspended except as otherwise provided for by this Constitution”. But this Bill has a provision under Sec 65 as well as Sec 133 prohibiting Constitutional remedies by specifically saying that no proceedings for liquidation of a service provider shall be entertained by any Court or Tribunal other than the Tribunal in accordance with the provisions of this Act (i.e. National Company Law Tribunal – NCLT).  Sec 133 says “Unless otherwise provided in this Act, no court or other tribunal shall have jurisdiction to entertain or adjudicate upon any matter which the Corporation, the appropriate regulator, the Tribunal or the Appellate Tribunal is empowered to decide or determine under this Act and no court or tribunal shall grant any injunction in respect of any actions proposed or reverse any such action”

Thus the proposed Bill is unconstitutional and void abinitio.    

2. No Liquidation of Banks should be thought of.

Any Act passed in the Parliament which is the Supreme Law making authority of the country should create confidence in the minds of the people.  In our country more than 80% of the depositors are classified as household depositors with small savings which they keep in the Bank with the absolute trust that the Govt will ensure repayment of the same.  The trust in the Public Sector Banks is more because of the sovereign guarantee.  But this Bill has brought in SBI as well as Public sector Banks under its ambit and has provided a clause for liquidation of these banks.  This will create insecurity among the depositors.  Everyone should recall that inspite of the US financial crisis 2008 which spread to Europe and most part of the world there was no run on Indian Banks because of this trust.  If this trust is broken it can lead to turmoil even in case of a small crisis in financial sector.  People will not like to keep them their savings in the banks as they may loose them in case of liquidation. Hence this Bill should be withdrawn to repose confidence of the depositors in the financial system of the country. 

3. Do Not Follow Western Model

This bill has been brought in based on the decision of the G7 countries which created a Financial Stability Board in the aftermath of the financial crisis 2008-09.  The Financial Stability Board proposed “Key Attributes” for Financial Resolution which was adapted by the G20 Heads of States in November 2011 as  new International standards for resolution regimes.  The Bill is absolutely adopted  on the basis of the key tributes, with copy and paste verbatim from the 2014 version of the, “Key Attributes” Document. 

First of all we should understand that these key attributes are not mandatory and many of the G20 countries including US have not adopted the same verbatim.  Though many countries have created resolution mechanism they are not the same.  In some countries the Resolution Corporation is under the umbrella of the Central Bank.  In some other countries the strategically important Banks have been asked to prepare their own resolution plan which is only under progress.  Hence we don’t have to follow the Western Model.

4. Uniqueness of Indian Banking System

We cannot compare the Public Sector Banks in India with the Banks of the west.  In United States between 2008 & 2012, 465 Banks failed during the financial melt down because they were totally private and many of them very small and some of them very big because they were not in the Government Sector.  Some were doing only specific areas of business like “Mortgage Banks”.  In our country after 1969, no Bank has failed.  Even the Private Sector Banks like Global Trust Bank were taken over by Public Sector Banks as the Reserve Bank of India already has powers for a resolution mechanism in case of mismanagement of Banks in the country.  We have RBI Act, Banking Regulations Act, Banking Acquisition and Transfer Act, SBI Act which are exhaustive and all the protections needed for the depositor are available in our country. 

5. We have a Robust Resolution Mechanism

The Financial Resolution and Deposit Insurance Bill, 2017 says “A Bill to provide for the resolution of certain categories of financial service providers in distress; the deposit insurance to consumers of certain categories of financial services; designation of systemically important financial institutions; and establishment of a Resolution Corporation for protection of consumers of specified service providers and of public funds for ensuring the stability and resilience of the financial system and for matters connected therewith or incidental thereto”

In our country, there is already a resolution mechanism for all the financial service providers which is available with the Reserve Bank of India.  In addition we have also brought in an insolvency and bankruptcy code.  We have also created a National Company Law Tribunal .  Hence there is no need for a new resolution mechanism. 

Similarly there is separate Insurance Regulatory and Development Agency (IRDA) for the Insurance Sector.  RRBs and Co-operative Banks have their own mechanism. 

In addition Deposit Insurance And Credit Guarantee Corporation which is a wholly owned subsidiary of the Reserve Bank of  India is functioning very effectively.  In fact since its inception, DICGC had to pay only 50.3 Billion Rupees whereas it has 701.5 Billion Rupees as deposit insurance fund as on march 2017.  It also has Rupees 716322 Million as investments.  As on March 2017, the balance in Deposit Insurance Fund is 645578.48 million and the balance in Credit Guarantee Fund is Rs.730027.64 million. Except Co-operative Banks no other banks have required claim from DICGC. This clearly shows that the depositors are safe in our country and there is no need for another resolution mechanism to provide deposit insurance to consumers. 

Already the Govt has a mechanism for designation of systematically important financial institutions. (SIFIs)  SBI, ICICI and HDFC Bank have been declared as SIFIs .  Hence there is no need for another body to identify SIFIs.

Finally there is absolutely no need for resolution corporation for protection of consumers as we have very good resolution mechanism in our country which is totally different from other countries in G20 and we have 21 Public Sector Banks, 56 RRBs, public owned Life Insurance corporation of India and General Insurance Corporation. The present bill will only shatter the faith the people of this country have on these institutions.  We don’t have to blindly follow what the west does, because our country has a unique financial system which is an envy of others and we should not take any step which will create a fear psychology among the citizens of this country. 

6. Absolute Power Corrupts absolutely

What is proposed in this Bill is creation of a Supreme Authority which will be more powerful than Reserve Bank of India, Central Vigilance Commission and even Central Bureau of Investigation.  Such an authority which will be under the Finance Ministry as the Ministry has powers to appoint the Chairperson and most of the members of the Resolution Corporation will be dangerous as independence of this authority will be subject to  the political party in power. 

7. Privatisation Route through FRDI

State Bank of India Act has a provision that SBI can never be liquidated.  Whereas this Bill proposes to amend various Acts including SBI Act and create a provision for liquidation of SBI, Public Sector Banks, RRBs and Co-operative Banks which is a dangerous step.  No Bank in our country can be liquidated.  So they will be only handing over of these banks to the Private Sector.  It is because of the mismanagement by the Private sector, Banks were Nationalised.  After Nationalisation Banks have done a major role in development of the economy.  Even now for the growth recovery of the economy, Banks have to play a key role. At this crucial juncture the passage of this Bill will only lead to further deterioration of the economy.

8. Proper Study not done

The Committee headed by Mr. Ajay Tyagi, Additional Secretary, Dept of Economic Affairs has only copied from the recommendations of the Financial stability Board and has not gone into the assessment of the Indian Financial Sector in toto. Hence the recommendations are not practical and not suitable for our country. 

9. Do not tamper with LIC & GIC

Life Insurance Corporation of India which was started with just Rs.5 crores investment by the Govt of India, today has grown as a great institution with excellent track record of honouring the Insurance policies and the LIC contributes to the annual budget of the country a huge sum.  LIC also is a share holder in most of the Banks and Financial institutions as per the directives of the Govt.  To even to talk about liquidation of LIC is a crime against the people of the country who have great faith in LIC. 

10. Want more Banks and not closure of Banks

Our country is still under banked when we compare with other developing and developed nations.  Hence we require more banks and more branches.  This resolution Corporation is going to only destroy what has been built over a period of more than 5 decades. 

Hence we have to campaign against the bill seeking support of the common masses.    

D.T. Franco

ngcfranco@gmail.com