The Financial Resolution and Deposit Insurance Bill, 2017, introduced in Parliament during the monsoon session, seeks to create a framework under which banks and other financial services providers would be allowed to use depositor’s money to bail themselves out in cases of bankruptcy.
The legislation, which was specifically introduced for resolution of failures of financial services providers, could end up in shifting the onus of failure of financial service providers to its customers, say reports.
The Bill provides for “bail-in” powers to banks. It is different from a traditional bailout in which government’s money helps bank tide over the crisis.
In case of a bail-in, it is the bank’s own deposits (that is your money) that is used to rescue the bank or reduce its liabilities.
The idea of a bail-in is one under which creditors and depositors absorb some of the losses in a scenario where a financial institution fails.
The Bill proposes to establish a ‘Resolution Corporation’ to monitor financial firms, calculate stress and take “corrective actions” in case of a failure.
According to Section 52 of the proposed Bill, depositors will lose their rightful claim to retrieve their savings in case of liquidation of banks and insurance companies.
At present, a depositor in a bank can draw partial comfort from the fact that his deposit is insured to the extent of Rs 1 lakh with the Deposit Insurance and Credit Guarantee Corporation which was set up under an act of Parliament in 1961.
If passed, the bill will greatly weaken depositors’ rights and jeopardise recovery of money deposited in case of a bank failure.