Fixed deposits are always viewed as secured investment avenues wherein the returns are guaranteed. Many risk-averse investors prefer to invest their hard-earned money in fixed deposit schemes of their banks expecting a guaranteed corpus after the selected duration. But what if your deposits were used to bail out an ailing bank which is on the verge of bankruptcy?
The introduction of FRDI Bill
The Financial Resolution and Deposit Insurance Bill (FRDI Bill) was introduced in the Lok Sabha on 10th August 2017. The objective of the bill was to provide a structural framework which would help banks, financial institutions and insurance companies deal with insolvency and bankruptcy. This Bill aimed at providing an easy way out for eligible financial institutions that are in a financial crisis. According to the proposal of the FRDI Bill, a Resolution Corporation would be established which would have complete authority regarding mergers, transfer of assets, integration of property of the financial institutions which are nearing insolvency.
Role of the Resolution Committee
The Resolution Committee was to handle a sick institution before it becomes completely bankrupt. The role of the Resolution Committee would be to classify the financial firms in five categories based on their financial condition. These categories are as follows –
- The critical risk to viability
The financial risk of the institution would be evaluated considering the following factors –
- Assets and liabilities of the institution
- Capital adequacy
- Management capability
- Quality of assets
- Leverage ratio
- Sufficiency of earnings
- Liquidity of the firm, etc.
The Resolution Committee would, therefore, make its assessments and then take measures to salvage an ailing financial institution.
Proposals mentioned in the FRDI Bill and their effects on your deposits
Various proposals were mentioned in the FRDI Bill and each proposal has an impact on your deposits. These proposals and their effects were as follows –
- Proposal: non-withdrawal of deposits
Under the proposed rule under the FRDI Bill, you would not be able to withdraw your bank account balance as per your requirement if the bank is in distress.
Currently, you can withdraw your account balance whenever you require as per the provisions of the Deposit Insurance and Credit Guarantee Corporation Act, 1961. But with this rule, your control on your deposits would be lost.
Your account balance can be converted to fixed deposits by banks and such deposits would be paid after five years
If your savings account or current account balance is converted to fixed deposits, you would lose liquidity and face problems when you need money.
To bail out an ailing bank your account balance can be reduced. The bank can reduce your account balance substantially.
If your account balance is reduced drastically, you would lose your hard-earned money invested in bank accounts.
If the bank is in a financial crisis, it has the power to decide how much and in which mode your investments would be returned.
You would have no knowledge of how your money would be handled by the bank and whether you would get the full amount that you have invested. This would create chaos as there would be no security.
The bank can give their stocks to customers against the value of their deposited money.
Even if you get the stock of the bank, the stock would be exposed to market volatility. This volatility was not present when your money was in the bank account. This measure would not be feasible for risk-averse individuals who don’t like market risks.
The insurance cover given to accountholders would depend on the account balance maintained by the holders.
Account-holders are given a uniform level of insurance coverage by banks irrespective of their account balance. The insurance cover was for INR 1 lakh. However, with the new rule, the cover would depend on the financial status of individuals. Rich accountholders can enjoy higher coverage while middle-class accountholders would be given a low cover. This would discourage middle-class individuals to keep their deposits in bank accounts.
The FRDI Bill is supposed to strengthen the framework of handling ailing and insolvent financial institutions. However, it has negative impacts on bank deposits and other bank accounts that you have. Given these negative impacts, the FRDI Bill was open to debates and negative reactions from all sectors. That is why the Government later announced that the FRDI Bill would be dropped. Though currently, the FRDI Bill is not under the proposal, you should know the proposals presented by the Bill and how such proposals would have affected your deposits.
Frequently Asked Questions:
- How does the insurance cover given by banks work?
As per the applicable provisions, bank deposits like a savings account, current account, fixed deposits, recurring deposits, etc. are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC). The insurance cover is given for up to INR 1 lakhs on your deposit balance. This means, that if you have a savings account and a fixed deposit account in a bank and the total balance of these accounts (including interest) is INR 80,000, you would get coverage for INR 80,000. Even if the bank is wound up, you would get INR 80,000 against your deposit accounts. However, if the balance in the deposit accounts is more than INR 1 lakh, coverage would be available only up to INR 1 lakh.
- Can I enjoy multiple insurance cover?
If the bank account is maintained under different names, you can enjoy multiple insurance cover on each account. For instance, you might have a bank account in your maiden name and another in your married name. In that case, each account would be able to enjoy insurance cover of up to INR 1 lakh.
- Can the FRDI Bill be reintroduced?
The reintroduction of FRDI Bill depends on the Government. The Government might modify the FRDI Bill and introduce it in future if it is feasible for all the segments of the economy.