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