Sunday, May 22, 2022

Demand rises for full security guarantee of money placed in FDs

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Public Police is an organisation that has taken up the cudgels on behalf of the middle class and their hard-earned money, placed in the custody of banks and NBFCs

By Sujit Bhar

In late 2017, the common people of India were suddenly shocked to find that there was a distinct possibility that all their deposits in banks, especially public sector banks, could suddenly be locked out of their reach, consumed by the bank itself if the bank fails or even flounders. They realised that their entire life’s savings, earned with their blood and sweat could suddenly vanish behind legal walls, and they could be left penniless.

So insidious were the intentions of a proposed bill, called the Financial Resolution and Deposit Insurance Bill, 2017 (FRDI) – approved by the government in June that year – that it empowered the government and the Reserve Bank of India (RBI) to frame new rules that could include a clause allowing a failing bank to use depositors’ money to stay afloat. Simply put, it would have meant that thebank would be empowered to reduce its own liability of not paying its depositors, that is the common man, by either locking his/her money for a longer time or asking him/her to completely forego his/her deposits.

Rakesh Maheshwari is a CA and the prime mover behind the initiative
Deo Datta, a former senior IAS, has been another moving force behind Public Police

It was called a ‘bail-in’ clause.

It created complete panic among depositors and the government, fearing a run on the banks, withdrew. The ogre of the Bill, however, stays in the background.

That was when people and experts started looking deep into the ‘fixed deposit’ system of India and found that there was absolutely no security whatsoever for the common man who trusted the banks in depositing his/her hard earned money for some respite during old age or in times of crisis.
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They found that even government banks can assure you a maximum return of Rs 1 lakh in the case the bank crashed. The rest of your money will just vanish into thin air. In this year’s Union budget, this amount has been raised to Rs 5 lakh. Technically, this is small assurance for a person’s life savings, with absolutely no future in sight.

Technically, even if the FRDI bill never comes out of its deep dungeon again, this clause is already robbing people of their night’s sleep.

Everybody was aware that something had to be done. However, what should be done was not clear. With this level of uncertainty, in the backdrop of a crashing economy, one set of people decided to take things in their own hands. An organisation called Public Police, mainly promoted by Rakesh Maheshwari, a chartered accountant and its CEO, wanted to demand of the government that the all small savings of the common man should be 100 percent insured.

This is a story of a developing movement that could again change the way people look at banks and the RBI and how they perceive their government’s support of their lifelong efforts. Technically, the Right to Life is a Fundamental Right, enshrined in the Constitution of India, and a person’s life’s savings can ensure this. This movement, therefore, is a fight for a person’s Right to Life.

The Movement

In every financial transaction or set of financial transactions, there is one unwritten chapter that each party involved in the contract agrees upon implicitly. That chapter is trust. Starting from a minor transaction in a kirana shop to a multi-billion dollar deal across multinationals across boundaries, or a through the mind-boggling buy-sell processes in high-frequency trading, every brick of each is built through trust.

Building public trust was the basic motive in former Prime Minister Indira Gandhi’s nationalizing of 14 private banks on July 29, 1969 (other than State Bank of India). It was hailed as a huge pro-poor drive by the government. So large was the impact that the black days of the 21-month Emergency that followed on June 25, 1975, could not wipe out this apparent euphoria.

The public was assured that their government was now a trustee of their hard-earned monies, deposited with public sector banks. It would have come as a shock for these small savers, who put their lives’ earnings into bank Fixed Deposits, that such was not the case. Actually, the implicit trust of the public had another crutch to rest on. That was the Deposit Insurance Corporation. The Deposit Insurance Corporation (DIC) Bill was introduced in Parliament on August 21, 1961, and Parliament passed it. The Bill got the assent of the President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on January 1, 1962.

The principal reason why the DIC came into being was a set of disastrous incidents.

In the late 1940s Bengal was virtually the financial capital of the country. But the health of the private banks was anything but good. The signs were clear and talk started in government circles and in the RBI. In 1949 the RBI decided to take a long hard look into the books of the banks and the government stepped back to allow the RBI to complete its due diligence.

That went on for a while, but when the Palai Central Bank Ltd., and the Laxmi Bank Ltd crashed in 1960, the idea was immediately put into action. That was when the DIC was formally born. It was a whole new experimental world for the finance ministry. Initially, the DIC’s influence was extended only to commercial banks, including the State Bank of India and its subsidiaries and even other commercial banks and the branches of the foreign banks operating in India.

The situation was as follows: As of 1968, with the enactment of the Deposit Insurance Corporation (Amendment) Act, 1968, the Corporation was to register ‘eligible co-operative banks’ as insured banks under the provisions of Section 13 A of the Act.

There was another concurrent scheme in play from 1960 when the Government of India, in consultation with the RBI, introduced a Credit Guarantee Scheme in July of that year. The RBI provided for the administration of the Scheme, as an agent of the Central Government, under Section 17 (11 A)(a) of the Reserve Bank of India Act, 1934. This was designated as the Credit Guarantee Organization (CGO) for guaranteeing the advances granted by banks and other Credit Institutions to small scale industries. The RBI operated the scheme up to March 31, 1981.

The RBI also promoted a public limited company on January 14, 1971, called the Credit Guarantee Corporation of India Ltd (CGCI). The main thrust of the Credit Guarantee Schemes, introduced by the Credit Guarantee Corporation of India Ltd., was aimed at encouraging the commercial banks to cater to the credit needs of the hitherto neglected sectors, particularly the weaker sections of the society engaged in non-industrial activities, by providing guarantee cover to the loans and advances granted by the credit institutions to small and needy borrowers covered under the priority sector.

These were the many socially responsible functions of the RBI till then, mandated by the Central government.

With a view to integrating the functions of deposit insurance and credit guarantee, the above two organizations (DIC & CGCI) were merged and the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978. Consequently, the title of Deposit Insurance Act, 1961 was changed to ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961’. 

That is the basic history of DICGC. If one looks deeper, it now not only has the responsibility of acting guarantor to small deposits, but also guarantees micro and small finances for the MSME sector, which are under tremendous stress under the pandemic conditions of today. It is little surprise, therefore, that the entire structure of DICGC is stretched to its limit.

Hence, despite the presence of DICGC, public confidence has taken a hit.

Within this situation, Public Police wants a complete overhaul of banking ideas in the country, and wants a process put in place that can assure the common man the existence and liquidity of his hard earned money.

The hurdles

This is a novel and noble venture no doubt, but the path forward is full of almost insurmountable hurdles. Maheshwari realizes this and has been associating himself and his organization with several key people who would be able to shake the policy makers out of their apparent stupor and invest time and energy in ensuring the peace of mind of the peoples.

Before going into who are enabling this process, one needs to inspect the hurdles and possible solutions in overcoming them.

In a discussion with Maheshwari, this correspondent placed before him certain questions that needed to be answered.

Here is the discussion.

India Legal: The premium amounts for the DICGC’s insurance of FDs and other deposits as defined by law are supposed to be borne by banks and not to be passed on to depositors. This is a good law. However, if insurance rates are raised to 100 percent, how do you propose these premiums be paid and by who? Would or should there be a split between banks (till a certain level) and depositors (after that)?

Rakesh Maheshwari: The insurance premium is paid by banks and it cannot be passed to the depositors. All banks adjust their rate of interest on deposit. If the insurance premium is increased then this may also be paid by banks. No bank can pay this out of their profits, so finally it will be paid by depositors. 

IL: Technically, for a bank each deposit is a liability. How, by law, is a liability insured?

RM: The deposits are liability, but they can be secured. DICGC is doing this by trying to pass a bill in Parliament.

NOTE: This needs a special note. The bill that the government is considering is the FDRI Bill that had spooked millions of investors and deposit holders.

In February this year Union Finance Minister Nirmala Sitharaman had said that Finance Ministry is working on the FRDI bill, but was not sure when it would be tabled in the House. The first adjustment that has gone into the bill is the massive five-fold hike in insurance of public deposits (when assurance was raised from Rs 1 lakh to Rs 5 lakh in the Union budget). Also, there have been recent changes in insolvency laws, including insolvency solutions for financial institutions. These have made the task of the bill onerous. A solution would not be easy.

IL: What is the mechanism that you propose should be put in place to achieve this huge task? Is there any country which has insured each deposit? Is there a model to follow?

RM: As per my information there is no such insurance cover for the whole deposit anywhere in the world. So, this is a completely novel provision to secure the depositors’ hard-earned money. 

IL: If we assume that entire FD amounts are insured by DICGC, the Deposit Insurance Fund (DIF) has to be re-invested. Since DIF can only be invested in government bonds, would there be enough such secure bonds available for such investment?

RM: There are 100 percent secured government bonds in which the insurance premium may be invested with the sovereign guarantee.

NOTE: A sovereign guarantee is the highest form of guarantee that a country can offer. If a default in this happens, one can say that it has been a default on the part of the country. The entire sovereign rating depends on the country’s honouring of such guarantees, hence each country is cautious about how much debt it takes in and makes sure it can service it.

IL: The rules state that the DICGC is liable to pay only when a bank goes into ‘liquidation’ and not when a bank is left under ‘suspension’. What is your proposition in that case?

RM: The DICGC will pay the amount on liquidation of the bank and cancellation of the bank’s licence. This may take a long time. Therefore, some provision must be made for immediate payment of amount due to the depositors.

If the details are perused, one will realise that Public Police is trying to secure for the depositors the status of secured financial creditors. The genesis of this idea could be traced back to June 6, 2018, when the Insolvency and Bankruptcy Code, 2016 (IBC) was amended through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018 (Ordinance). This was necessitated because the housing scams that had happened and it was necessary to give the homebuyers as much importance in the case as vendors.

The ordinance helped home buyers and allottees under the Real Estate (Regulations and Development) Act, 2016 (RERA) get the status of financial creditors under IBC (pursuant to the amendment to the definition of financial debt).

That allowed the home buyers and other allottees, or buyers and long-term lessees under real estate projects, to be able to invoke Section 7 of IBC. This section allows financial creditor(s) (either individually or jointly) to file an application in NCLT for initiating corporate insolvency resolution process against a defaulting company) against defaulting promoters.

That was a path-breaking move by the government. Rakesh Maheshwari and his Public Police want to use this legal lever, recently afforded to the ordinary people, to wrench a deal out of the government. That is a clever move.

More coverage

The ‘movement’ is looking for more coverage.

Says Maheshwari: “We need to cover all savings of the common man. They should cover RDs, deposits with NBFCs, Mutual Funds etc. Without those, the exercise would fall flat.”

One wishes these ideas bear fruit as quickly as possible.

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