I think most of us know what is Bail-Out during post-2008 economic this term bail-out was used more often in discussions and news which clearly was intended to recapitalise the banks and financial institutions to carry out its business of lending and advances as usual. But we as Indians should need to get familiar with the term “bail-in”. Also don’t be surprised if tomorrow once the financial resolution and deposit insurance bill get passed in the coming winter session of parliament, then the certain clauses in the bill refers to a situation where you and I would be sharing a percentage of hard earned money to solve the NPA crisis. We all know that several of our public sector banks have been facing very severe NPA crisis because of their percentage of stressed assets has gone beyond control. So to overcome the situation our hard earned savings which are lying in the bank in form of deposits might be used to mitigate the losses the banks had made when they lend a huge sum of money to big corporates in India.
Unlike other economies in the world where people barely keep their savings in the form of deposits in banks because it fetched very less rate of interest for them, so they used to park the money in other asset classes. But the scenario in India is entirely the opposite, nearly 70% of the deposits in public sector banks are being contributed by the household savings of middle-class population. So imagine a scenario where we have to forgo a certain percentage of our deposits to support the bank to get out of the woods. Then what would be the guarantee that our savings in the banks will safe or in case tomorrow if walks in to your bank and asks the bank to liquidate the deposit and pay the money back to you, don’t be surprised if you get a reply from the official that you are eligible to get a certain percentage back, rest we will give it you after some time. If that happens I am sure we all will be crestfallen. The bill says
“The Corporation shall, in consultation with the appropriate regulator, specify the total amount payable by the Corporation with respect to any one depositor, as to his deposit insured under this Act, in the same capacity and in the same right”.
Let’s take a hypothetical situation, a scenario in which is a bank is facing liquidation an amount up to 1lakh which includes interest has been guaranteed under the deposit insurance scheme. But so far we never faced such situations because RBI as a regulator intervened proactively to help the problematic bank to get merged with a larger bank by transferring all its existing liabilities and assets to the bigger bank, hence helped by saving all retail investors not to lose their money. But if the new bill after all the discussions and deliberation comes to a reality then stressed banks control will completely come under the prerogative of” resolution corporation” In that case, it is not sure how much we as a depositor have to sacrifice on the losses bank has incurred over a period of time.
In this regard, the bill says the following:
“…the Corporation may, in consultation with the appropriate regulator, if it is satisfied that it is necessary to bail-in a specified service provider to absorb the losses incurred, or reasonably expected to be incurred, by the specified service provider and to provide a measure of capital so as to enable it to carry on business for a reasonable period and maintain market confidence, take an action under this section by a bail-in instrument or a scheme to be made under section 48…..”
So let’s wait till the final contents of the bill come out in the open till then we all have to wait by keeping our fingers crossed.