There has been a lot of noise about the recent FRDI Bill 2017 and its implications on the common man’s money. While some are calling the bill out for being too hasty, others find it unfair. The noise has primarily been owing to the bail-in clause that exists in the bill. The clause allows for the use of the depositor’s money in the situation of a financial emergency. However, let us not be too quick to make a judgment already.

This controversial clause has caused a lot of people to worry that their deposits with the banks are not safe from financial trouble. However, the fact is that the risk to one’s hard-earned money is no more with this bill than it already was. Only in the case of the country’s economy or the banks running into serious financial trouble is there even a slight chance that your deposits might be impacted.

What can you do to protect your money?

There is no need to panic already. The last 50 years tell us that the possibility of your banks being in financial trouble is only an extreme scenario. If you want to be extra cautious, you can reduce your risk by diversifying your deposits across different banks, to ensure that you do not hold deposit sums larger than the new insurance limit in any of your accounts. Additionally, you can take this bill as an encouragement to invest through options such as Mutual Funds, bonds, equity, PPF, and real estate, instead of just stocking the money in the bank account.

Do not forget one thing- The bail-in clause might have everyone worried. However, the chances of the clause even being applicable are only in the worst case scenario. The bill is about establishing measures to keep that from happening.

What are the measures taken in the FRDI bill to prevent financial trouble?

To prevent financial trouble from striking, the FRDI Bill provides for the establishment of a Resolution Corporation. This will be tasked with monitoring financial firms such as banks and NBFCs, anticipating their risk of failure. The corporation would also be empowered to step in and prevent these financial companies from going bankrupt. If need be, it would also be writing down their liabilities. In the event of a bank failure, the Corporation would also be tasked with providing deposit insurance up to a certain limit yet to be specified.

What is the controversial Bail-In Clause?

The primary fear around the bill stems from its Clause 52, the bail-in clause. This clause means that in the event of a financial institution going bankrupt, the depositor’s funds can be used in the resolution mechanism.

The fear arises from the fact that a bail-in is different from a bail-out. A bail-out is the use of public funds to inject into a company in case of financial trouble. It is what people are familiar with so far. A bail-out happened in the US post the 2008 financial depression. On the other hand, the most popular instance of a bail-in one can remember is from Cyprus. In the year 2012-13, a bail-in of about ₹13 billion took place in Cyprus.

Why you don’t need to worry?

The clause has led a lot of people to believe that they could lose their hard earned money that they deposited in the bank. However, even today the insurance that is provided only protects the deposits up to ₹1 lac. In case your bank is in financial trouble, any deposit over ₹1 lac would fall to negotiations and forfeiture.

Further, the bill also ensures that the claims of uninsured depositors would be given precedence over the claims of unsecured creditors and government dues. This is not the case with the current framework in place.

Are Public Sector Banks protected from the Bail-in?

The government has recently clarified that it stands ready to bail out any banks in the public sector. This means that for public sector banks a bail-in would not be needed. In summary, if your money is in a governmental bank, such as State Bank of India, or Punjab National Bank etc., the chances of your money being affected are even less.

Why do we need the FRDI Bill at all?

Currently, bank deposits in India are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). The DICGC was set up in 1961. Under the current provision, the deposit amount insured per depositor per bank stands at ₹1 lac. No changes have been made to increase that amount since 1993. In today’s time, that amount is hardly any insurance at all.

To ensure the depositors with an amount higher than ₹1 lac, a new resolution corporation needs to be established. This will replace the DICGC. This is where the FRDI Bill 2017 comes into the picture. It is likely to ensure that the insurance exceeds ₹1 lac per depositor.

Paving the Way For Smarter Money Moves

The bill is a much-needed step towards preventing and managing financial emergencies in the country, especially post 2008 recession. This is the time when the government is encouraging people to interact more and more with the formal banking sector, through efforts such as Jan Dhan Yojana and Demonetization. It then becomes critical to establish a dam in case a financial flood hits.