FRDI Bill: Worried HNIs dial money managers over bail-in clause

The fear of depositors' money being used for bail-ins of banks under the Financial Resolution and Deposit Insurance (FRDI) Bill has triggered panic among wealthy Indians, with many of them seeking expert help to mitigate any risk to their deposits.

Big money managers and lawyers that ET spoke to said they have received inquiries from clients asking whether or not to pull out their fixed deposits, despite assurances from the Prime Minister and the finance minister on protecting the interest of depositors. Banks said despite fear mongering, flight of capital from fixed deposits was not evident. But many are still concerned.

"We have had several calls from Bollywood celebrities to cricketers to high net worth individuals to find out the applicability of the bail-in clause and how it will impact them," said a lawyer involved with the matter. "The understanding that has set in is that while smaller depositors will be spared, high-value deposits could be used to bail-in banks."

In the past month, there has been a public hullabaloo about whether bank deposits are safe and whether depositors' money would be used to bail-in banks leaving them high and dry. The misconception over the FRDI Bill has been such that it forced the Prime Minister and finance minister to intervene and allay fears that the government was committed to "fully protect" depositor's money. The finance ministry has issued a statement saying that the FRDI Bill would bring in additional protections to depositors in a more transparent manner.

"The fear largely is due to rumour mongering that goes on in the social media. We haven't seen any run on our deposits," said an official at a state-run bank who did not wish to be named. "Ten banks are under prompt corrective action. Misinformed people spread rumours that these banks will shut down, and obviously deposit holders will be scared. But, history has shown that RBI and government together do not let banks die," this banker said.
RBI's prompt corrective action puts restrictions on banks on certain expenses and lending to non-investment-grade companies. The action is triggered when a bank's share of bad loans increases and its capital and return on assets stay below the minimum required levels for two consecutive years. The FRDI Bill aims for an orderly winding up of a financial institution.

It talks about setting up of a Resolution Corporation that will identify early warning signals of distress for financial institutions including banks, NBFCs, insurance companies, stock exchanges, etc. It also recognises that zero failure of financial firms is not always possible, the government and the regulator need to ensure that the failure is contained.

"Today when you see bank NPAs at 15-20% and you take the Bill in that context, the sense that emerges is why should only equity holders keep putting money the other creditors should also bear the share of the failure," said Karthik Srinivasan, group head-financial sector ratings at ICRA. "So, if as a deposit-holder I will lose my money that sounds a little scary. But, I think we need to wait before passing a judgement because the finance ministry has already said they will protect depositors' money."

Rajesh Narain Gupta, a managing partner at SNG & Partners, said the Resolution Corporation was required to ensure "any action by it, including activating the bail-in tool, must not leave any creditor, including depositors, in a worse position than they would have been in the event of the financial entity's liquidation; else the depositors are eligible for compensation."