Finance ministry defends ‘bail-in’, says needs prior consent

New Delhi: In a detailed defence of the Bill, the finance ministry on Tuesday said that prior consent will be needed to cancel the depositor’s liability beyond insured amount in case of a bank failure in the Financial Resolution and Deposit Insurance Bill, 2017.

There had been some apprehensions that “bail-in” provision in the Bill may result in people losing their hard-earned savings to “bail-in” banks in case they go down.

The ministry said that presently in case of the forced mergers of banks under the Banking Regulation Act, 1949, the right of depositors of a merging bank can be reduced and has been reduced, without the consent of depositors.

It said that bail-in amounts to liabilities’ holders bearing a part of the cost of resolution by reduction in their claims.

At present, deposits with banks are insured upto Rs1 lakh. “The similar protection would continue under the FRDI Bill and the Resolution Corporation is empowered to increase the deposit insurance amount,” the ministry added, “Currently uninsured depositors, that is, beyond Rs 1 lakh, of a banking company are treated on par with unsecured creditors under the law and paid after preferential dues, including government dues, in the event of its liquidation.”

“As per the provisions of the FRDI bill, the claims of uninsured depositors in the case of liquidation of a bank will be higher than those of the unsecured creditors and government dues. Therefore, the rights of uninsured depositors will be better protected and such depositors will have an elevated status in the FRDI Bill compared to the existing legal arrangements,” said the ministry.

It said interests of depositors would be better protected under the FRDI Bill. The ministry also said that several safeguards has been added in the “bail-in” provision in the Bill and insured deposits of banks can not be used in case of bail-in.

It said that the Resolution Corporation will have the option to design an appropriate bail-in instrument, which will be subject to scrutiny and oversight of Parliament.

“Cancellation of the liability of the depositor beyond insured amount will be possible only with the prior consent of the depositor,” said the ministry.

“Bail-in power can be used in a judicious and reasonable manner only by the Resolution Corporation and it will have to ensure that all creditors, including uninsured depositors, get at least such value, which they would have received in the event of liquidation of a bank,” the ministry said.

“In case of injudicious and unreasonable exercise of bail-in power by the Resolution Corporation, for example, where the depositors of a bank get less value than in liquidation, such affected depositors will have the right to get compensation from the Resolution Corporation on an order of the NCLT,” said the ministry.

It added that bail-in is only one of many tools in the Bill. “Others are acquisition, merger and bridge service provider, and is to be used either singly or in combination,” it said.