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PERSPECTIVES

FRDI Bill, 2017 function in the case of failure of any finan-


cial entity under the single umbrella of
the RC.
Inducing Financial Instability The management of the proposed RC
will comprise of a chairperson, an ex
officio member from the union finance
Prasenjit Bose ministry, one ex officio member each
from the RBI, SEBI, IRDA, and PFRDA, three

T
Given the far-reaching nature of he principal objective of the Finan- members nominated by the central gov-
the changes it seeks to introduce cial Resolution and Deposit Insur- ernment and two independent members.
ance (FRDI) Bill, introduced in the Sections 36 and 37 of the bill provides
within the financial system,
Lok Sabha in August 2017, is to provide a that the RC will, “in consultation” with
the Financial Resolution and framework for the resolution of failures the extant regulators, lay down an objec-
Deposit Insurance Bill should not of financial institutions, covering the entire tive criteria to classify all financial service
be rushed through Parliament. financial sector. The bill seeks to establish providers into five categories of “risks to
an all-encompassing Resolution Corpo- viability”—low, moderate, material, immi-
Widespread apprehensions
ration (RC), which will have powers to nent, and critical—based on their capi-
regarding provisions of the FRDI acquire and transfer the assets or even tal adequacy, asset quality, management
Bill, particularly the bail-in liquidate any financial service provider capability, earnings, leverage, and so on.
provision, have already forced in the case of its probable failure—be it a Once a service provider falls into the
commercial, regional or cooperative bank, material or imminent risk category, it
the government to pause. It is
an insurance company, a payment system will have to submit a restoration plan to
only appropriate that an informed operator, a non-banking financial company the regulator and a resolution plan to
public debate precedes the (NBFC), a mutual or pension fund, or a the RC within a period not exceeding 90
tabling of this legislation for securities firm. The FRDI Bill also seeks days after such classification. Once a
to repeal the Deposit Insurance and Credit service provider comes under the purview
passage, which can significantly
Guarantee Corporation (DICGC) Act, 1961 of the RC, its performance will be subject
alter the contours of India’s and delegate to the RC, the powers of in- to periodic review and inspections by
financial sector. suring deposits, collecting premium, and the RC in order to assess whether it
compensating depositors of an insured breaches the critical risk to viability cri-
service provider in case of liquidation. teria. In the case of a difference of opin-
Presently, the various segments of the ion between the appropriate regulator
large and diverse financial sector in India and the RC, there are provisions mandat-
are regulated by different institutions, like ing consultations, but the power of final
the Reserve Bank of India (RBI) for the determination rests with the RC.
banks and the NBFCs, the Insurance Reg- The resolution process of a financial
ulatory and Development Authority (IRDA) service provider can involve transfer or
for the insurance sector, the Securities acquisition of assets, merger or amalga-
and Exchange Board of India (SEBI) for mation with another healthy financial
securities firms and mutual funds, and firm, liquidation following the order of
the Pension Fund Regulatory and Devel- the appellate tribunal (National Company
opment Authority (PFRDA) for pension Law Tribunal), and also utilisation of
funds, all governed by various acts of Par- new resolution instruments like bail-in
liament. The public sector banks (PSBs), and creation of a “bridge service provider.”
which have emerged as the most dominant The bill also provides for the designa-
financial institutions in India since bank tion of certain financial service providers
nationalisation, with around 70% share as “systemically important financial in-
in total banking assets and above 40% stitutions” (SIFIs) by the central govern-
share in total financial assets,1 are gov- ment, the failure of which may disrupt
erned by separate legislations as are the in- the entire financial system, given their
surance companies in the public sector. size, complexity, and inter-connectedness
The FRDI Bill intends to amend around with other financial entities. The RC will
Prasenjit Bose (boseprasenjit@gmail.com) is an 20 of these legislations,2 listed in Schedule have additional powers in respect of
economist based in Kolkata.
IV of the bill in order to bring the resolution such SIFIs, with their risk assessment,
40 JANUARY 20, 2018 vol lIiI no 3 EPW Economic & Political Weekly
PERSPECTIVES

restoration, and resolution being subject sheets over the years clearly show that resulted primarily because of the moral
to more stringent conditions. its outstanding liability arising out of the hazard problem associated with too-big-
claims of depositors of failed banks, mostly to-fail banks. It has, therefore, identified
Bank Resolution in India small urban and rural cooperative banks, a set of large global banks and financial
Several questions arise regarding the had peaked at 6.6% of the deposit insur- entities as “globally-systemically important
rationale as well as the practicability of ance fund in 2008–09 and has fallen financial institutions,” imposed higher
such an overhaul of the financial resolu- since then to below 1%, 2013–14 onwards capital standards for them and has put in
tion regime in India, which the proposed (Table 1). The DICGC has accumulated a place a system of monitoring their per-
bill seeks to attain. The official argu- deposit insurance fund of `70,155 crore formance on a regular basis. The pream-
ment that there is no specific, stand- till March 2017. ble to the key attributes document states:
alone law to deal with the failures of If anything, this reflects that bank An effective resolution regime (interact-
financial institutions is not reason enough. failures in India have become rarer over ing with applicable schemes and arrange-
In fact, bank nationalisation was initi- time in the recent past. The changes in ments for the protection of depositors, in-
surance policy holders and retail investors)
ated in the late 1960s, inter alia, to ad- the resolution regime proposed through
should ... (iv) not rely on public solvency
dress the problem of frequent bank fail- the FRDI Bill are clearly not being driven support and not create an expectation that
ures. Not a single PSB has failed in India by domestic financial conditions. such support will be available … (ix) be
since then. Bank failures in the post- credible, and thereby enhance market dis-
liberalisation period have all been of pri- Global Trends in cipline and provide incentives for market-
Resolution Reforms based solutions. (FSB 2011: 3)
vate sector banks, which were compul-
sorily amalgamated with PSBs to protect What has driven the process of regulatory The FSB expects that the creation of
the interests of the depositors. overhaul vis-à-vis the financial resolution powerful resolution authorities across
Five such cases have occurred: the regime in India is the pressure emanating jurisdictions, with options to either sta-
Benares State Bank (BSB) amalgamated from the Group of 20 (G20) and the Finan- bilise an unviable financial firm through
with Bank of Baroda on 19 June 2002; cial Stability Board (FSB), which have been transfer or sale of assets to a third party
Nedungadi Bank amalgamated with setting the financial regulatory reform and/or taking recourse to “an officially
Punjab National Bank on 1 February 2003; agenda since the global financial crisis. mandated creditor-financed recapitali-
Global Trust Bank merged with Oriental The “Key Attributes of Effective Resolu- sation of the entity that continues pro-
Bank of Commerce on 14 August 2004; tion Regimes for Financial Institutions” viding the critical functions”4—bail-in,
Ganesh Bank of Kurundwad amalgamated was adopted by the FSB in October 2011, in other words—along with the liquida-
with the Federal Bank Limited on 2 Sep- which was subsequently endorsed by the tion option protecting insured depositors,
tember 2006; and United Western Bank G20 heads of states at the Cannes Summit would address the moral hazard prob-
amalgamated with Industrial Develop- (in November 2011) as the “new interna- lem involving the giant global banks and
ment Bank of India (IDBI) on 3 October tional standards for resolution regimes.” financial institutions.
2006. Only one commercial bank has While trying to set up an omnibus There is, however, no reason to be-
faced liquidation—the Bank of Karad resolution authority with powers to lieve that these “market-based solutions”
in 1992.3 resolve financial institutions across the would deter the banks and financial in-
Several small urban and rural cooper- spectrum, codifying the processes of re- stitutions from indulging in speculative
ative banks have also faced insolvencies, solvability assessments, recovery and practices during the next asset price
with the RBI cancelling their licences resolution planning, and incorporating bubble, when the rules of the game
and the DICGC settling the claims of new resolution instruments like bail-in within the financial markets remain
their depositors over time. But the bigger and bridge institutions, the FRDI Bill has largely the same. Neither is it assured
banks as well as the broader financial basically followed the template set in the that the higher capital requirements and
system in India have been stable over FSB’s “key attributes” in toto. resolution mechanisms would be ade-
the decades, remaining largely unscathed The FSB’s framework of regulatory quate in precluding taxpayer-funded
even during and after the global financial reform is itself quite problematic. It starts bailouts once such bubbles burst, espe-
crisis of 2007–08. The DICGC balance with the premise that the financial crisis cially since the already too-big-to-fail
Table 1: Deposit Insurance—Operational Highlights (` crore) global banks continue to grow in size.
2007–08 2008–09 2009–10 2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 However, in the absence of any viable
Deposit alternative framework given the present
insurance fund 13,362 16,156 20,152 24,704 30,093 36,120 40,617 50,453 60,254 70,155 geopolitical realities, the G20 member
Of which states have been pursuing these regula-
Fund balance
tory reforms in their quest to build a
(actuarial) 1,553 1,817 3,275 3,774 4,768 5,265 5,068 5,207 5,412 5,598
more resilient global financial system.
Fund surplus 11,809 14,339 16,877 20,930 25,325 30,855 35,549 45,246 54,842 64,557
Outstanding
What is noteworthy here is the differen-
liability for claims 488 1,075 764 603 689 905 392 314 252 222 tial speed as well as combination in which
Source: DICGC Annual reports, various years. these reforms are being implemented
Economic & Political Weekly EPW JANUARY 20, 2018 vol lIiI no 3 41
PERSPECTIVES
Figure 1: Composition of Assets of the Household Sector (Annual Series) The other provisions Bank of China and the Bank of China,
(% of Gross Financial Saving) have been implemented with total assets worth $3.4 trillion,
70
in certain jurisdictions, $3 trillion, $2.8 trillion, and $2.6 trillion
60
50
but not in others. The respectively, have emerged as the four
Bank deposits
40 picture vis-à-vis the in- largest banks in the world today, ahead
Life insurance fund
30 surance resolution re- of Japan’s Mitsubishi UFJ Financial
Provident and pension fund
20 gimes is even more Group ($2.58 trillion), US’s JPMorgan
10 complicated, with none Chase ($2.49 trillion) and UK’s HSBC
0
Currency
of the jurisdictions other ($2.37 trillion).6
-10
Shares and debentures than Hong Kong, Japan, In contrast, India’s largest bank, the
-20
and the US implement- state-owned State Bank of India (SBI)
1990–91
1991–92
1992–93
1993–94
1995–96
1997–98
1998–99
1999–2000
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
2010–11
2011–12
2012–13
2013–14
2014–15
2015–16
2016–17
ing all the seven provi- ranks 55 among the top 100 global banks
sions compliant with the with assets worth $493 billion. No other
Source: Handbook of Statistics on Indian Economy, Reserve Bank of India, 2016–17.
FSB key attributes. India Indian bank appears in the top 100 list.
within the jurisdictions of the 24 mem- had not implemented any of the provi- None of the Indian banks appear in the
ber-states of the FSB. sions as of May 2017. Now, the FRDI Bill list of 30 Global Systemically Important
The annual status of implementation 2017 seeks to implement all the resolu- Banks (G-SIBs), identified by the FSB,
reports by the FSB provide information tion tools suggested by the FSB key at- which need to maintain higher capital
on the bank resolution reforms being tributes at one go, and that too in the buffers and meet other stringent regula-
carried out in the FSB jurisdictions in form of an omnibus legislation. tory benchmarks compared to other
terms of the following resolution tools: banks. Therefore, there is no case for a
powers to transfer or sell assets and lia- The Indian Context wholesale emulation of the financial res-
bilities; powers to establish a temporary This eagerness displayed by the Indian olution methods and tools of the advanced
bridge institution; powers to write down government in implementing a financial economy financial systems in India.
and convert liabilities (bail-in); power to reform agenda in toto, which is suited to Only nine out of the 24 member-states
impose temporary stay on early termina- the needs of the advanced economies, is of the FSB have a single resolution
tion rights; resolution powers in relation difficult to understand. Despite decades authority for resolution of all types of
to holding companies; recovery plan- of financial globalisation and cross-border financial institutions. Others have some
ning for systemic firms; resolution plan- capital flows, financial systems across form of coordination arrangements in
ning for systemic firms; and powers to economies still vary quite significantly. place between the different regulatory
require changes to firms’ structure and While the financial system in North authorities and only a few have appoint-
operations to improve resolvability. American and European countries are ed any “lead authority” to coordinate the
The latest FSB report (July 2017) shows dominated by large private banks and resolution of domestic entities of the
that on the one hand, countries like financial institutions, it is the public sec- same financial group.7
France, Germany, Italy, Netherlands, tor that dominates the financial sector in There are both pros and cons of creat-
Spain, Switzerland, Hong Kong, United China, India, and many other developing ing a single authority like the RC to deal
Kingdom (UK), and the United States (US) economies. The crisis that engulfed the with resolution for the entire financial
have already implemented all the reso- financial sectors of the advanced econo- sector, as envisaged in the omnibus FRDI
lution tools; Japan has implemented all mies after the collapse of the Lehman Bill. While it can create common regula-
but the bail-in reform; and Canada all Brothers in 2008 was an outcome of the tory standards across all segments of the
but the powers to require changes to the inherent problems of a privately owned, financial sector, bring more financial in-
firm’s structure. On the other hand, market-based, deregulated financial sys- stitutions within the purview of deposit
countries like Argentina, Australia, Brazil, tem. The problems afflicting the finan- insurance, and make the process of reso-
China, Indonesia, South Korea, Mexico, cial systems of economies like China or lution speedier and more efficient, there
Saudi Arabia, Singapore, South Africa, India, such as the bad loans accumula- are serious possibilities of conflicts aris-
and Turkey have implemented the reforms tion in PSBs, are of a qualitatively differ- ing between the regulators and the RC
only partially, with none of them imple- ent nature. A one-size-fits-all regulatory over the classification of risk to viability
menting the bail-in provision, some not approach in resolving these distinct of a financial firm as well as over its
even implementing the temporary bridge problems is bound to fail and backfire. restoration or resolution plans.
institution provision and so on.5 Moreover, the Indian case is also un- The RBI had expressed the view in the
Therefore, while the advanced econo- like China’s, given the vast difference in “Report of the Committee to Draft Code
mies are clearly pushing this resolution the size of their state-owned financial on Resolution of Financial Firms” that
reform agenda, the emerging or devel- institutions. The “big four” state-owned the RC should have the powers to inter-
oping economies are more circumspect banks in China, namely the Industrial and vene only at a stage when a firm enters
about them, particularly the provisions Commercial Bank of China, China Con- imminent risk to viability and leave the
of bail-in and temporary bridge institution. struction Bank Corporation, Agricultural ground of material risk for the RBI to
42 JANUARY 20, 2018 vol lIiI no 3 EPW Economic & Political Weekly
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cover, through its primary supervisory which currently remains at a level fixed A simple adjustment for retail infla-
tool of Prompt Corrective Action (MoF almost a quarter century ago. tion since 1993 (when the `1 lakh deposit
2016: Annexure II, pp 40–43). Concerns The Federal Deposit Insurance Act of insurance limit was set) for the past 24
were also raised by the RBI on the poten- the US not only defines the “standard years would imply that the limit today
tial conflict between its own supervisory maximum deposit insurance amount” as should not be less than `5 lakh. A com-
risk classification and that of the RC and $2,50,000 (since April 2010) but also parison with a few selected countries
the power given to the central govern- provides for an upward revision of the shows that India’s deposit insurance cov-
ment to designate the SIFIs in India, amount adjusting for inflation, every erage limit to per capita income (at pur-
rather than the RBI.8 The FRDI Bill has five years. It is remarkable that a govern- chasing power parity or PPP) ratio is only
not addressed these concerns satisfacto- ment which is keen to emulate the reso- around 0.2, which is extremely low by
rily, leaving room for regulatory con- lution reforms being carried out within global standards. Not only are the limits
flicts and confusion. the advanced economies like the US, has much higher within the advanced econ-
Another serious concern regarding overlooked this important provision of omies, but emerging economies like
the creation of an omnibus RC relates to the US deposit insurance law, which pro- China, Brazil, and Indonesia have a de-
the apprehensions of regulatory capture. tects the interests of the depositors. Sec- posit insurance coverage limit that is
Given the diversification of financial tion 29 of the FRDI Bill, in contrast, almost five, four, and 12 times its per
conglomerates into sectors like banking, merely states that the RC will specify the capita income respectively (Table 3). It
insurance as well as the securities market, total amount payable with respect to any is only appropriate that the deposit in-
a diversity of regulators would perhaps one depositor “in consultation with the surance coverage limit in India be at
better serve to protect the regulatory appropriate regulator.” It is this omission least twice of its per capita income, which
processes from the dominance of vested of a specific maximum amount in the implies enhancing it to `10 lakh. Fur-
interests. All these concerns need to be FRDI Bill, alongside the provision of bail- thermore, the periodic revision of this
addressed and the costs and benefits care- in, which has created apprehensions with- amount, adjusting for inflation and per
fully weighed before effecting an overhaul in vast sections of bank customers re- capita income should be mandatory.
in the resolution regime in India through garding the security of their deposits. The official justification for maintain-
the creation of an all-powerful RC. ing the deposit insurance coverage limit
Table 2: Deposit Insurance Limits and per Capita
The proposed powers of the RC to deny Income (at PPP) in Selected Jurisdictions at the present low level is that 67% of
emoluments and bonuses of employees Jurisdiction Deposit GDP per Deposit Insurance term deposits currently being held in the
Insurance Capita Coverage Limit
of a financial service provider under var- Coverage Limit at PPP to per Capita
commercial banks are below `1 lakh and
ious stages of resolution, to change their (Current $) (Current $) Income Ratio only 1.3% of the term deposits are over
DICL Per Capita DICL/PCI
service conditions, and even terminate `15 lakh; and hence small depositors are
Income (PCI)
them without recourse to other avenues United States 2,50,000 57,638 4.3 adequately covered under the present
of justice, need serious reconsideration Australia 1,93,100 46,790 4.1 coverage limit.10 This is hardly convinc-
since they militate against the hard-won Indonesia 1,47,600 11,631 12.7 ing. First, the suggestion that all deposi-
rights of the employees.9 France 1,18,610 41,466 2.9 tors with term deposits over `1 lakh are
Germany 1,18,610 48,884 2.4 affluent is unacceptable. At the current
Deposit Insurance Coverage Limit Italy 1,18,610 38,345 3.1 minimum wage rate of `300 per day for
The most serious drawback of the FRDI United Kingdom 1,13,658 43,081 2.6 unskilled employees notified by the cen-
Bill lies in the omission of the maximum Japan 88,300 41,476 2.1 tral labour ministry, the annual income
deposit insurance amount. The DICGC Canada 78,609 44,025 1.8 of a family of agricultural workers, who
Act, 1961, which the FRDI Bill seeks to China 76,060 15,559 4.9 are among the poorest sections of society,
repeal, clearly mentions in Section 16(1) Brazil 64,025 15,153 4.2 would exceed `1 lakh.
Hong Kong 64,000 58,651 1.1
that the total amount payable by the Second, the issue here is not one of small
Singapore 37,205 88,003 0.4
DICGC to any one depositor shall not ex- versus large depositors but of the security
Russia 19,210 23,162 0.8
ceed `1,00,000, with the same section of bank deposits as a whole, which have
India 1,562 6,583 0.2
empowering the corporation to raise The figures for deposit insurance coverage limit have been
historically been the main vehicle in which
this aforesaid limit with prior govern- converted to US dollars at the current exchange rates; data financial savings of Indian households are
on per capita gross domestic product (GDP) is for 2016.
ment approval. The maximum insur- Source: RBI (2013); SBI Ecowrap, December 2017;
parked (Figure 1, p 42). The proportion
ance amount was `1,500 when the DICGC World Bank. of bank deposits in the gross financial
Act was passed in 1961. This has subse- Table 3: Composition of Assets of the Household Sector (Decadal Averages) (% of Gross Financial Saving)
quently been raised five times in the Decades Currency Bank Deposits Life Insurance Provident and Shares and Units of Unit
Fund Pension Fund Debentures Trust of India
past, the last time being in May 1993.
1980–81 to 1989–90 11.9 40.3 7.5 17.5 3.9 2.2
Any government serious about protect-
1990–91 to 1999–2000 10.3 34.7 10.1 18.8 7 3.8
ing the interests of ordinary depositors 2000–01 to 2009–10 9.5 44.5 17.1 12.8 4.1 -0.06
would have first and foremost raised this 2010–11 to 2016–17 7 51.9 19.9 14.6 2.8 …
maximum deposit insurance amount, Source: Handbook of Statistics on Indian Economy, Reserve Bank of India, 2016–17.

Economic & Political Weekly EPW JANUARY 20, 2018 vol lIiI no 3 43
PERSPECTIVES

savings of the household sector was amalgamation/merger with PSBs. While that the provisions in the FRDI Bill
around 40% on an average in the 1980s it is at times difficult for the PSBs to that seek to amend a gamut of existing
(Table 2, p 43). This had fallen to a dec- match the profitability or service quality legislations governing the SBI, the Life
adal average of below 35% in the 1990s, of private and foreign banks given the Insurance Corporation (LIC), and other
with the proportion of shares and deben- differences in their operational objec- public sector financial institutions have
tures and Unit Trust of India (UTI) units tives and setting, accountability to the originated.
increasing from 4% and 2.2% in the 1980s government and the public keeps the An approach that seeks to attain “neu-
to 7% and 3.8% in the 1990s, respectively. PSBs away from risky and speculative fi- trality” in ownership and competition of
After the outbreak of the UTI scam in nancial activities. This is why the confi- financial service providers is fundamen-
2001, however, the proportion of finan- dence of the depositors do not generally tally flawed. Out of the 91,445 bank
cial savings in shares and debentures erode in the PSBs even with a deteriora- branches of PSBs in 2017, 32% are in rural
fell to 4% in the last decade while the tion in bank financials. areas, while 21% in metropolitan areas.
proportion of bank deposits increased to The RBI has noted that the private sec- For the private sector banks, only 20% of
almost 45%. The current decade has tor banks do not enjoy such consumer their branches are in the rural areas,
seen a continuation of the same trend, confidence and during the global finan- while 30% are in metropolitan areas
whereby bank deposits have on average cial crisis, deposits migrated from the (Table 4). The shares are similar for the
comprised over 50% of gross financial private sector banks to PSBs. This led the largest banks in each category, the SBI
savings while the proportion of shares RBI to conclude that, “the predominance Group and the ICICI. The private sector
and debentures have fallen to below 3%. of government owned banks in India has banks, which accord topmost priority to
The year 2016–17 has been remarkable contributed to financial stability in the their profitability, concentrate more on the
because of the extraordinary decision of country” (RBI 2013: Chapter 8). metropolitan areas to spread their busi-
the government to suddenly withdraw However, the Report of Committee to ness, while the PSBs with a larger com-
86% of currency notes in circulation of Draft Code on Resolution of Financial mitment towards financial inclusion have
`500 and `1,000 denomination. As a sig- Firms has taken a completely contrary a higher share of bank branches in the
nificant shift in financial savings away view of the matter. It has rather blamed rural areas. It should be clear from this that
from currency was forced upon by the the public ownership of PSBs for the the PSBs and the private sector banks do
government, the proportion of bank de- “lack of competitive neutrality” in the not operate with the same objectives.
posits in gross financial savings soared financial sector: The efforts to increase financial inclu-
to over 60% in 2016–17, while that of For public sector financial firms, an implicit sion by opening zero balance accounts
shares and debentures also increased or explicit guarantee by government, and under the Pradhan Mantri Jan Dhan Yo-
sharply to 10% (Figure 1). exemptions from mainstream resolution sys- jana (PMJDY) brings out the difference
tems, may be creating a perception of safety
The household financial savings be- in the minds of consumers, and an expectation between the PSBs and the private sector
haviour in India over the last two decades that they will be insulated from the failure of banks more sharply. Over 80% of such
clearly shows an increasing preference such firms. This has detrimental consequenc- accounts have been opened by the PSBs
es for competition in the financial system. For
for bank deposits, making it even more so far, 16% by the regional rural banks
instance, in times of crises, there is a flight of
important to ensure the security of those funds towards public sector banks and away (RRBs), and only 3% by the private sector
deposits. From the point of view of sys- from private banks, which is a competitive banks (Table 5, p 45). If “neutrality” is
temic stability, the trust and confidence advantage arising solely out of ownership. It not ensured either in terms of their com-
is important for competitive neutrality that a
of the depositors in the banking system mitment towards financial inclusion or
level playing field be created between public
is vital, especially in the Indian context. sector and private sector firms. Among other in terms of their operational autonomy
A significant increase in the deposit in- things, this means application of resolution vis-à-vis the government, on what basis
surance coverage limit, particularly at a framework to all financial firms—
public and private. (MoF 2016: 14) Table 4: Branches of Scheduled
time when the PSBs have come under
Commercial Banks (as on end-March 2017)
stress on account of the accumulation This understanding is in line Branches
of bad loans over the past decade, would with the report of the Financial Rural Semi-urban Urban Metropolitan Total
be most appropriate in bolstering depos- Sector Legislative Reforms Com- Public sector banks 29,033 25,647 17,890 18,875 91,445
itors’ confidence. mission (FSLRC) headed by B N Share in total
bank branches (%) 32 28 20 21 100
Srikrishna, which had recom-
SBI Group 7,819 7,156 4,430 4,606 24,011
Implications for PSBs mended the setting up of a Reso- Share in total
The history of financial resolution in lution Corporation in its report bank branches (%) 33 30 18 19 100
India in the period since bank nationali- submitted in March 2013. The Private sector banks 4,822 7,803 5,158 6,878 24,661
sation shows that public ownership of FSLRC had advocated “owner- Share in total
banks has made a big difference, not ship neutrality” in the process bank branches (%) 20 32 21 28 100
ICICI Bank Ltd 979 1,444 987 1,440 4,850
only in preventing frequent bank fail- and choice of tools deployed
Share in total bank
ures but also protecting the depositors in the resolution of financial branches (%) 20 30 20 30 100
from failing private banks, through service providers. It is from here Source: Report on Trend and Progress of Banking in India 2016–17, Reserve Bank of India.

44 JANUARY 20, 2018 vol lIiI no 3 EPW Economic & Political Weekly
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can “neutrality” be sought between the these risky provisions so far. Even the RBI notes
PSBs and private banks in competition working group considers such provisions 1 Data on asset share of public sector banks till
end-March 2012 from Subbarao (2013).
and financial resolution? to be hazardous. If the government gen-
2 These include the Banking Regulation Act,
The attempt to attain “neutrality” be- uinely intends to create a robust financial 1949; the Reserve Bank of India Act, 1934; the
tween the public sector financial institu- resolution regime, which will enhance Insurance Act, 1938; the Life Insurance Corpo-
ration Act, 1956; the General Insurance Busi-
tions and those in the private sector, by rather than erode the trust of the public ness (Nationalisation) India Act, 1972; the Re-
bringing them under a common resolu- in the financial system, these harmful gional Rural Banks Act, 1976; the Banking
Companies (Acquisition and Transfer of Under-
tion regime is the most retrograde and provisions of the FRDI Bill need to be takings) Act, 1970; the Banking Companies
impracticable aspect of the FRDI Bill. removed altogether as a prerequisite. (Acquisition and Transfer of Undertakings)
Act, 1980; the State Bank of India Act, 1955; the
The PSBs function as the cornerstone of Multi-State Co-operative Societies Act, 2002;
systemic stability as far as the Indian Conclusions the National Housing Bank Act, 1987; the PFR-
DA Act, 2013; the Export–Import Bank Act,
financial system is concerned, a fact that The latest Financial Stability Report 1981; the Securities Contract (Regulation) Act,
has been noted by the RBI. If the sovereign (December 2017) has reported a 3.3% 1956; among others.
3 See, RBI (2014). There were 15 more cases of
guarantee for insulating PSBs and other drop in the year-on-year deposit growth voluntary amalgamation of commercial banks,
public financial institutions from fail- for all scheduled commercial banks, cut- including the recent merger of six state-owned
banks with the State Bank of India in 2017.
ures is diluted and the powers to resolve ting across all bank groups, between These do not qualify as bank failures.
them divested from the government, it March and September 2017. This is the 4 See “Preamble” in FSB (2014).
5 Sixth Report on the Implementation of Reso-
will adversely affect the trust and confi- worst possible time for the government lution Reforms, Financial Stability Board,
dence of the depositors in the PSBs and to press for the passage of a bill whose 6 July 2017.
weaken the entire financial system. provisions can erode the trust and confi- 6 “Ranking: The World’s 100 Largest Banks,” Stand-
ard & Poor’s Global Market Intelligence, 2017.
The controversial bail-in provision dence of the depositors in the PSBs and 7 See, RBI (2014).
also needs to be seen in this context. The other public sector financial institutions. 8 It is noteworthy that the RBI has already issued
the “Framework for Dealing with Domestic
RBI working group on the resolution While the proposed reforms in the Systemically Important Banks (D-SIBs)” in
regime, while not rejecting the bail-in financial resolution regimes have been July 2014. The SBI and the Industrial Credit
and Investment Corporation of India (ICICI)
mechanism per se, had recommended pushed by the advanced economies were designated as D-SIBs in August 2015 and
that deposit liabilities, inter-bank liabili- through the Financial Security Board giv- the Housing Development Finance Corporation
(HDFC) was added to the list in September 2017.
ties, and short-term debt be entirely ex- en their experiences of bank failures and 9 See, “Wrong Diagnosis, Harmful Prescription:
cluded from its purview, because these taxpayer funded bailouts following the A Critique of the FRDI Bill, 2017,” All India
Bank Officer’s Confederation (AIBOC); Nation-
liabilities “if subjected to bail-in can in- global financial meltdown of the last al Alliance of People’s Movement (NAPM);
duce financial instability.”11 decade, such a reform agenda is not New Trade Union Initiative; and Centre for Fi-
nancial Accountability (CFA), November 2017,
However, the FRDI Bill ignores that grounded in the Indian realities, where http://www.cenfa.org/publications/a-critique
recommendation and only excludes “any the dominance of PSBs had ensured the -of-frdi-bill-2017/.
liability owed by a specified service pro- insulation of the financial system from 10 See, SBI Ecowrap, December 2017, Issue No 56.
Data on size of bank deposits pertain to
vider to the depositors to the extent such the vicissitudes of the crisis. Ironically, March 2016.
deposits are covered by deposit insur- the FRDI Bill 2017 seeks to weaken the 11 See RBI (2014: 104, Recommendation 16,
para 4.93).
ance” [Section 52(7)], which implies that same PSBs and public sector financial in-
deposit amounts over and above the de- stitutions by diluting their sovereign
posit insurance cover limit are included guarantees and introducing hazardous References
under the bail-in mechanism. Similarly, resolution provisions like bail-in. In or- FSB (2011): “Key Attributes of Effective Resolution
Regimes for Financial Institutions,” Financial
short-term debt over seven days maturity der to build a more effective financial Stability Board, October, http://www.fsb.org/
and unspecified categories of “client as- resolution regime in India, not only should wp-content/uploads/r_111104cc.pdf.
sets” have also been kept within the bail-in these potentially destabilising provisions —(2014): “Key Attributes of Effective Resolution
Regimes for Financial Institutions,” Financial
purview. If such provisions are enacted, of the FRDI Bill be abandoned, but the Stability Board, October, http://www.fsb.org/
there can be a serious flight of depositors deposit insurance cover limit also needs what-we-do/policy-development/effective-res-
olution-regimes-and-policies/key-attributes-
and creditors away from the PSBs and to be enhanced substantially. The desir- of-effective-resolution-regimes-for-financial-
other public sector financial institutions. ability of an omnibus Resolution Corpo- institutions/.
MoF (2016): “Report of Committee to Draft Code on
None of the emerging or developing ration requires further debate, in the Resolution of Financial Firms,” Department of Eco-
economies, which have undertaken context of relevant experiences of other nomic Affairs, Ministry of Finance, 28 September.
RBI (2013): “Banking Structure in India—The Way
resolution reforms, have implemented emerging and developing economies. Forward,” Discussion Paper, Reserve Bank of
India, August, https://rbidocs.rbi.org.in/rdocs/
Table 5: Pradhan Mantri Jan Dhan Yojana—Progress Report (as on 13 December 2017) (Figures in crore) PublicationReport/Pdfs/DPBS27082013_F.pdf.
Bank Name / Type Number of Beneficiaries Number of Beneficiaries Number Deposits in Number of Rupay — (2014): “Report of the Working Group on Reso-
at Rural/Semi-urban at Urban Metro of Total Accounts Debit Cards Issued lution Regime for Financial Institutions,” Re-
Centre Bank Branches Centre Bank Branches Beneficiaries (in ` crore) to Beneficiaries serve Bank of India, January.
Public sector banks 13.29 11.51 24.8 56,106.34 18.58 Subbarao, D (2013): “Banking Structure in India:
Looking Ahead by Looking Back,” speech by
Regional rural banks 4.18 0.76 4.95 12,132.98 3.64 RBI Governor at the FICCI-IBA Annual Bank-
Private sector banks 0.6 0.39 0.99 2,160.92 0.92 ing Conference, 13 August, https://rbi.org.in/
Source: https://pmjdy.gov.in/ (accessed on 25 December 2017). scripts/BS_SpeechesView.aspx?Id=828.

Economic & Political Weekly EPW JANUARY 20, 2018 vol lIiI no 3 45