In the 4th century BC, Dionysius II, king of
Syracuse, let his fawning courtier, Damocles, sit on his throne for one day,
but with a sword hanging over his head by the hair of a horse’s tail. After
Damocles was thus enthroned, Dionysius asked “do you feel happy, now? “. Damocles
wrote his name in history as the first man to beg to be ‘dethroned’. The bail
in provision is just that, Damocles sword hanging over depositors’ head making him just as unhappy.
True, the sword had always been hanging. As unsecured
creditors, depositors get just what little is left after paying off secured
creditors of a bank under liquidation. But the aam aadmi wasn’t aware of it.
Though some banks did run into trouble, RBI, by handholding weaklings till
nursed to health, and in extreme cases merging or amalgamating it with stronger
ones, saw to it that depositors never ran aground. And the thought of a failed PSB
was akin to blasphemy.
But what bail in does is to drag the depositor out of this
comfort zone. When push comes to shove, to enable a bank in existential throes
to continue operations its depositors may be required to forgo some of their savings-
in barbaric, nay, barber’s terms, a haircut. And the haircut may cost them much
more than what they pay for one at a Javed Habib outfit. Why, it may even be a tonsure,
a glistening pate but with no hair on it. Another possibility is that deposits
maybe converted into instruments of capital for the bank, thus deferring
depositors’ claim on it indefinitely. All of this is embedded in SEC 52 of the
bill.
Sec 52 (3) A bail-in provision means any or a
combination of the following: – (a) a provision cancelling a liability owed.;
(b) a provision modifying, or changing the form of, a liability owed …(c) a
provision that a contract or agreement under which a covered service provider
has a liability is to have effect as if a specified right had been exercised
under it.
FRDI, as it stands, arms regulators with statutory powers to
cannibalise bank deposits in stressful situations.
The second rude shock that bail in delivers is to put public
and private sector banks on the same pedestal. The veil of safety that government
ownership of PSB offered is lifted. That cannot be comforting , most of all to senior
citizens who live off interest income from their time deposits. The existing
deposit insurance of Rs one lac will barely ensure his survival for a year if his
deposits get immobilised or cancelled.
To be fair, FRDI springs from deliberations of G20 in London in
April 2008 in the aftermath of 2008 global financial meltdown. It set up a Financial
Stability Board that impels member countries to evolve structures designed to
avert 2008 like systemic failures. India, a G20 member must follow suit. Presently,
FSB is seeking to evolve ‘Principles for Bail in’. Obviously, bail in is
destined to become a not uncommon operative tool for resolving distressed banks,
its first application having been already recorded in Cyprus in 2013.
Financial regulations evolve in response to particular
situations of distress within a given financial structure. The banking system
in the West is predominantly privately owned. That presented a moral hazard to
regulators confronted with 2008 crisis in which banks fell like ninepins, bursting
the myth of ‘too big to fail’. Should taxpayer’s money be used to bail out
greedy bank managements that had created the crisis. Bail in emerged as a response
to this moral dilemma. A bailed in bank exposes its managements to the adverse consequences
of its maladministration and avarice by extracting sacrifices from all
stakeholders.
On the other hand, India’s banking system is structurally
different. PSBs conduct 75% of banking business hence the rapacious quest for profits
and fat bonuses that fuelled the 2008 crisis is absent. That helped Indian banking to ride out the crisis with nonchalance.
Therefore, the imperative for FRDI is not averting systemic
failure, for there has been none . But over Rs 10 lacs crs of loans by PSB are sour, which some experts hold
is stymieing credit disbursal. For a government reluctant to go the whole hog to
bail out affected PSBs, bail in looks an attractive resolution tool.
Properly speaking, if the west faced a moral hazard issue, bail in should pose an equivalent issue of equity to the state. How can the state, as owner,
absolve itself of responsibility for mismanagement that led to pile up of NPAs
in its backyard ? Political parties may blame each
other to score brownie points but that doesn’t change state’s culpability as
owner. Moreover, depositors have no role in running their banks. Rather,
banks which mismanage affairs betray their trust. Culling savings in any manner tantamounts to a double whammy, state instead of rescue delivers a left upper cut.
My concern here is only with PSB whose profits have over the
years flown into the Consolidated Fund of India by way of dividends. Therefore ,it is only fair to expect its owner to use his immense resources to bail out his troubled babies. Depositors have done their bit by putting in as much as 75% of total bank deposits in PSB. Leave them alone , to a vast majority of them bank
savings may be a question of life and death, the mere thought of a loss of
deposits is a nightmare to a senior citizen. Further can the nation afford to engender doubt and apprehension among this vast multitude of savers by retaining bail in?
Many reassuring voices from high pulpits in government, claim
it enhances depositor protection without quite pointing out how. All that it ensures
is any haircut on uninsured deposits (that is, amounts held beyond DICGC
guaranteed Rs 1 lac in any account) would not be more severe than in the event
of liquidation. Both protections, insured deposit of Rs 1 lac and a
proportionate share in the liquidation proceeds already exist. Some say the
bail in provision would be invoked only if expressly agreed to at the time of
deposit acceptance. That would create a situation where banks to bolster their
own safety refuse non-bail in deposits. A word of caution against the transparency induced by the bill. With bail in
proviso in situ wouldn’t there be a premature run on a bank 'transparently' classified as ‘imminent’ or ‘critical’ in the
resolution process ? An averment is made that occasions to invoke the provision
would never arise and that resort to it is tantamount to political hara-kiri
that no leadership would dare. Well then, why keep the Damocles sword hanging?
Notwithstanding all evangelic rhetoric the bail in proviso is
in for its avowed intent. But its application to state owned banks has little
legitimacy. FRDI must exclude PSB from bail in. It is but natural that the
state sweep away the mess of its banks, but unnatural to use deposits as
broomsticks to do the sweeping. No bail in, please.
