A viral message has been going around on Whatsapp, “This tsunami will wipe out your money lying in the banks." This message, apparently written by a Mumbai based chartered accountant, has created panic in you and other depositors in banks leading to the question, Are your deposits in banks safe? The cause of this rumor is the Financial Resolution and Deposit Insurance Bill or simply, FRDI Bill. The FRDI Bill is up for debate in the Winter Session of Parliament.
The FRDI Bill aims to create an early warning system for Financial Institutions like banks, insurers, pension funds, stock exchanges and NBFCs. An entity called the Resolution Corporation (RC), will be set up to insure bank deposits and the insured limit will be decided by the RBI. The Resolution Corporation (RC), will replace the Deposit Insurance and Credit Guarantee Corporation (DICGC).
So what is the DICGC? The Deposit Insurance and Credit Guarantee Corporation, insures your bank deposits up to a maximum of Rs 1 Lakh for both Principal and Interest. The deposits you have in different branches of a bank, are aggregated to give you an insurance cover up to Rs 1 Lakh. DICGC insures you for savings deposits, fixed deposits, current deposits and recurring deposits. Banks pay the insurance premium to give you the benefit of deposit insurance.
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After reading this viral message, you and other citizens are worried. You believe that the Government will use your bank deposits to bail out banks which are in trouble because of wrong lending decisions. The cause of your worry is the bail-in clause in the FRDI Bill, which you believe banks will use to take your deposits to make up for the bad loans from big corporate borrowers.
1. Is your money in banks safe?
You and other middle class citizens deposit money in saving bank accounts and FD's, believing that your money is safe and you can earn some interest on it. After reading the Whatsapp message, you think it wise to diversify or spread your deposits across different banks. You are needlessly worried.
Take a look at this fact. No Public Sector bank has failed since Independence. Even if a Private bank or Co-operative bank fails, RBI will merge them with larger banks. So your deposits in banks are absolutely safe.
2. Why so much debate on bail-in clause of the FRDI Bill?
If you go through Section 52 of the FRDI Bill, you will come across a concept called bail-in. A bail-in is the exact opposite of a bail-out. While a bail-out is financial assistance given to a failing business to save it from collapse, a bail-in means creditors and depositors money is used to provide financial assistance to a failing bank or a financial institution.
So do you need to be afraid of the bail-in clause? Take a look at the DICGC. The deposits you have in different branches of a bank, are aggregated to give you an insurance cover up to Rs 1 Lakh for both Principal + Interest. The amount of Rs 1 Lakh was set way back in 1993. The bail-in clause does not apply to insured deposits and your money is safe.
To understand the bail-in clause of FRDI Bill you need to study the financial crisis of 2008, where many big Banks and Insurers failed in USA and Europe. The US Government bailed out these banks and insurers with taxpayers money. So can the same thing happen here?
Western banks are risk takers and look to give profits to their customers and themselves, by taking risks for higher profits.
Indian banks have excellent fail safe mechanisms and look to protect depositors mainly the middle class, which deposits money in banks with safety in mind. So Indian banks will not collapse the way Western banks did in 2008, meaning the bail-in clause will never have to be used.
3. So why the FRDI Bill?
After the Financial Crisis 2008, a Financial Stability Board was set up in 2009, to prevent a situation where tax payers money would have to be used for a bail-out. India being a part of the Group of 20 economies, endorsed the Financial Stability Boards proposal where a "bail-in" would be used to make sure a country's economy is not destroyed in a financial crisis.
You know that DICGC insures your deposits in banks up to Rs 1 Lakh for both Principal + Interest. What about the rest of the money or amounts above Rs 1 Lakh? The FRDI Bill brings clarity on this subject.
If the unthinkable happens like the Too Big to Fail Banks and a large number of banks in India collapse, then the bail-in clause kicks in. But stop and think...can this happen....Even if it does, the Government will step in and save these banks. Not doing so would be political suicide.
So even if a number of banks fail, you don't need to worry about deposits even above Rs 1 Lakh. FRDI Bill has not set the insured limits, but you can be pretty sure it will be above the Rs 1 Lakh, set way back in 1993 to account for inflation.
The amount of Rs 1 Lakh insured under DICGC, is sufficient to cover most deposits in the country. So the deposits of the middle class citizens are safe. The FRDI Bill could hike this amount to account for inflation. Be Wise, Get Rich.
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