The debate around the Financial Resolution and Deposit Insurance (FRDI) Bill is good news. The citizens of a country must engage with a potential law that affects their money. I wrote on the issue last week, where I argued that the FRDI Bill proposes an early warning system for crisis in financial firms. You can read it here. Based on their financials, banks and other financial firms will be classified according to their risk. When the risk becomes more than moderate, a set of data reporting protocols kick into place, giving the system ample time to prevent the bank (and other financial firms) from failing. If it indeed does fail, there is a process-driven system for mergers and take-overs. It is only when all of this fails that a bank goes into liquidation. It is like getting a warning 10 miles before the train hurtles towards a cliff. 

My mailbox and twitter feed are buzzing with comments and questions about the Bill and its meaning for us, the average taxpayers, depositors and citizens. While most people are happy to understand the issue much better, there are questions and fears that remain about the fate of depositors’ money in case a bank fails and goes for liquidation. The questions are around the safety of deposits if a bank fails, especially on the bail-in clause that allows for a restructuring of a bank’s debt and one of the provisions is that deposits can be used to do that. But the Bill has protections in place for depositors—of a deposit insurance and of consent. The finance minister has taken to social media saying that the government will stand behind depositors’ money. 

The questions that people writing to me are: Why have the bail-in clause at all if the government will stand behind bank depositors? Will banks allow consent? What if all banks remove the option for consent? Writes one person: “As you are aware, in general, we don't have options of choosing while signing deposit forms. If the option is available, then it's a good bill." Writes a retired private sector woman: “I’m really panicking. Should I renew my FD (fixed deposit)? I’m feeling on shaky ground (sic), please explain more." Is the Bill applicable to all banks or just financially weak banks? No one trusts the government when it says: trust me. Why should we trust the government with our deposits? 

There are four threads to the comments. One, when the government is saying it will stand behind deposits, why have the bail-in clause at all, they ask. It is a valid argument—why hard code in law what you don’t intend to do? There is a Standing Committee (you can see the members here) that is going to give its report on the Bill in the next few days and they should address the issue of why have a bail-in clause when the government says it will stand behind deposits. Why worry depositors when the government intends to protect them? 

Two, will banks give the consent option at all, is a recurrent worry. Those questioning the ability of banks to insert a no-consent clause do have a point. Do we trust banks to act fairly? We don’t. We need to turn to the sector regulator, the Reserve Bank of India (RBI), and not the government, to ask: what has it done to protect the retail customers of banks so far and should we trust it to force banks to give a consent option to depositors? The evidence of consumer protection by the RBI is poor. For instance, RBI has not been able to get the banks to pass on falling interest rates to retail borrowers. RBI took till 2010 to change a formula that was just unfair to depositors. You can read about it here. The rampant mis-selling of insurance and mutual funds through the banking channel is documented within the RBI, within other regulators, and within the government. What has this independent regulator done about it? Not much. RBI’s primary concern is preventing bank failure and if the fee income from mis-selling is keeping the banks running, so be it. Why else is it dragging its feet on actioning the charter of consumer rights? The deadlines on implementation have come and gone. Internal audits in the RBI have flagged the mis-selling issue but the mis-selling is still the norm rather than the exception. 

Three, readers worry that their deposits will be more at risk post-Bill than now. Those afraid for their deposits post the Bill must understand that their risk is higher today than it will be once there is an early warning system and a process-driven resolution framework in place. What works better: a signal-driven system of road rules or the ad hoc decision of a cop at every intersection? The greater the transparency in the system, the less likely is a bad loan pile-up and then a sudden shock to the system. 

Four, the RBI has managed to pull through the bank crisis in the past, why do we need a new agency, they write. To answer this we must ask another question: under whose watch did India’s bank non-performing assets (NPAs) rise to the current level? Did the past regulators at the RBI not know how some bank chiefs were appointed, how depositors’ money was used to fund political cronies? Under the watch of the past ‘independent’ RBI governors, the entire story unfolded, and they are now asking, why have a system of accountability and transparency in place. Know this: you and I will finally pay, either as taxpayers or as depositors. When the government recapitalises a bank, it uses taxpayer money, or it borrows or prints currency to do so. When it borrows too much or prints notes, it results in inflation. Our real interest rates on bank deposits fall and sometimes go negative, like they did in 2010. Governments ‘inflate away their debt’—reduce the real value of what they owe by reducing the purchasing power of our money. 

When we say we distrust the government and that it will eat up our money, then we should be digging a hole in the floor and burying gold. If we do not trust the government, why are we holding currency as cash, deposits, in insurance policies and in mutual funds? Funnily, it is the same government that we want to invoke when we want a loan waiver or want it to guarantee our bank deposits. Of course, the people must check the misuse of power by the government, but to oppose a new law that actually increases transparency and builds in accountability is defeating our own selves. But given the public outcry and debate on the bail-in issue, and given that there is so much fear, misinformation and panic on the safety of depositors' money, there are two options in front of the government. One, remove the bail-in clause for retail depositors below a certain threshold, to set at rest the fears of people. Two, if bail-in is in the law with the added protection of a consent clause for depositors, write it in law that banks give the option to customers. Sadly, given the track record of the sector regulator, the RBI, it cannot be trusted to get banks to behave fairly towards their retail customers, and the consent option must be hard-coded in law. 

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint and on the board of FPSB India. 

She can be reached at monika.h@livemint.com.

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