PAUL NORONHAThe State Bank of India headquarters in Mumbai. Since the SBI has already been notified as a “systemically important financial institution”, it is only natural that a sense of insecurity has set in.

The Resolution Corporation that the Central government is planning to set up through an Act of Parliament can result in a clean-up of banks and other financial institutions, with serious consequences for even common depositors. By PURNIMA S. TRIPATHI

THE Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, which the Union Cabinet cleared on June 14, 2017, is to be introduced in the coming session of Parliament. The Bill seeks to create a Resolution Corporation which will exercise control over banks, insurance companies, regional rural banks (RRBs), cooperative banks and other financial institutions. The Bill is under the consideration of a parliamentary committee.

The general direction and management of the affairs and business of the Resolution Corporation will vest in a board, which will consist of a chairperson; one member each representing the Finance Ministry, the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development Authority (PFRDA); three whole-time members; and two independent members to be appointed by the Central government.

The board will have the power to order amalgamation, merger, liquidation and acquisition of any bank, including State Bank of India (SBI) and other nationalised banks, RRBs, cooperative banks and payment banks, and any insurance company, including Life Insurance Corporation of India (LIC) and other general insurance companies, if, in its judgment, the institution concerned (bank or insurance company) has got “imminent” or “critical” risk to its viability. The corporation, which will be under the Finance Ministry, will be empowered to hand over any such institution to another entity, public or private. It will be authorised to order discontinuation of service of employees or transfer of their employment or reduction of their remuneration upon such “resolution”.

The FRDI Bill also envisages closure of the “Deposit Insurance and Credit Guarantee Corporation” (DICGC) established in 1961, which has been an insurance cover for the savings of depositors.

According to banking sector representatives, the creation of the Resolution Corporation goes against the spirit of nationalisation of banks in 1969 when it was decided that public sector financial institutions should serve the masses, besides the marginalised and underprivileged sections of society, and not be concerned with earning huge profits at the cost of the ordinary masses.

According to C.P. Krishnan, general secretary of the Bank Employees Federation of India’s Tamil Nadu chapter, the Financial Stability Report of the RBI states that out of the total non-performing assets (NPAs), 88.4 per cent is the creation of large borrowers with loan exposure of Rs.5 crore and more. “On top of it, 12 large borrowers constitute 25 per cent of the NPAs, as admitted by the RBI itself,” he said.

He claimed that 56 RRBs spread over 600 districts, with around 23,000 branches, rendered excellent service to the rural people by lending almost 80 per cent of their total advances to the poor and the marginalised. Besides, cooperative institutions, including 370 Central Cooperative Banks with around 14,000 branches and 93,000 primary agriculture cooperative societies, extended real service to the common man.

Similarly, despite stiff competition from private insurers, the LIC ranked number one in terms of market share and service in the life insurance sector. The LIC contributed Rs.14,23,055 crore to the 12th Five-Year Plan, which was double the Rs.7,04,151 crore it contributed to the 11th Plan, he said and added that there was no need for such an overarching mechanism as the Resolution Corporation.

Overriding powers

In fact, the Bill seeks to place the entire financial structure of the country at the mercy of the government. The Resolution Corporation has been given powers that override those vested in the RBI, the Central Vigilance Commission (CVC) and even the Central Bureau of Investigation (CBI). Besides, the measures taken by the corporation cannot be challenged in court, including the Supreme Court. The Bill categorically states that an order for the winding up of a bank or an order sanctioning a scheme of compromise or arrangement or of amalgamation, or an order for the supersession of the committee of management or other managing body of a bank and the appointment of an administrator thereof made with the previous sanction in writing or on the requisition of the RBI or the corporation, as the case may be, shall not be liable to be called into question in any manner.

Besides, the Bill also proposes to amend the SBI Act in order to insert a clause for its liquidation. This has given rise to apprehensions that in due course the government might even take recourse to privatisation of the SBI. The clause says:

“After Section 45, the following section shall be inserted, namely:

“45A. Notwithstanding anything in this Act, the Resolution Corporation established under… the Financial Resolution and Deposit Insurance Act, 2017, shall have the powers to carry out resolution of the State Bank under that Act.”

As explained, the term resolution could mean amalgamation, merger, acquisition, or liquidation and the resolution process could be initiated if in the opinion of the board the bank is under “critical” or “imminent” danger for its viability.

The fears about the SBI have arisen because a few weeks before the Union Cabinet cleared the Bill, the SBI was designated as a “systemically important financial institution (SIFI)”. The designation has its implications. In the Bill, the criteria for designating an institution as a SIFI could depend upon its size, complexity, nature and volume of transactions with other financial service providers, interconnectedness with other financial service providers, nature of services provided by the financial service providers and whether they are difficult to substitute, and such other matters as may be prescribed.

Once an institution has been designated as a SIFI, it comes under constant scrutiny of the corporation. The Bill proposes that every institution so designated shall, within a period of 90 days from the publication of the order of designation under Section 25, submit a restoration plan to the appropriate regulator and a resolution plan to the corporation, in accordance with the provisions of Section 38.

Also, every such financial institution shall provide such information to the corporation at such intervals and in such manner as may be specified by regulations made by the corporation in order to monitor the safety, soundness and solvency of the institution.

The Bill specifies that the corporation and the appropriate regulator may, on the basis of the information received from any SIFI or otherwise and for reasons to be recorded in writing, jointly inspect the institution in such manner as may be specified by regulations made by the corporation in consultation with the appropriate regulator. Subject to the provisions of this Act, the regulation and supervision of SIFIs shall continue to be governed by the appropriate regulator with which the SIFI is registered.

What this means is that a SIFI continues to be under close scrutiny by the Resolution Corporation, which may initiate action against it at any given time—order its acquisition or amalgamation or liquidation. Liquidation may be ruled out in the case of the SBI, but handing it over to another entity is a real fear.

Bankers protest

According to a note circulated by the All India Bank Officers’ Confederation (AIBOC), which is spearheading the agitation against this Bill, the FRDI Bill vests tremendous powers in the corporation, even undermining those that vest in the RBI, the CVC and the CBI. According to this note, the bankers have taken exception to the Bill because it seeks to undermine the spirit of bank nationalisation.

Besides, the SBI, which has a huge reach into the nooks and crannies of India, will come under the mercy of the government and will always be under threat of privatisation, whereas the present SBI Act says the bank can never be liquidated/privatised. Besides, if such an eventuality arises, no court can question this action. Since the SBI has already been notified as a SIFI, it is only natural that a sense of insecurity has been set in. Besides the SBI, ICICI Bank and HDFC Bank have also been designated as SIFIs.

Similarly, the Resolution Corporation can transfer an insurance company to another service provider, decide the performance incentive for the chairman and executives of an insurance corporation, become a receiver, and remove managerial and other persons from office. The corporation will also have the power to supersede the board of directors of an insurance corporation. The corporation can also become a liquidator.

According to Thomas D. Franco, general secretary of the AIBOC, the Bill gives draconian powers to an authority, which will be under the Finance Ministry, and also dilutes the powers of the RBI. Banks and insurance companies will be at the mercy of this corporation’s board, which in turn will be subservient to the Finance Ministry.

In the name of deposit insurance also, the Bill is discriminatory in nature: it goes against the interest of small depositors through its provision of “bail-in”. The depositor whose money is given as loan to the borrower is likely to lose his share of deposit in case of a “bail-in”, whereas the borrower who availed himself of the loan is likely to get off scot-free. According to Franco, the “bail-in” concept is a double whammy.

In Cyprus, depositors lost almost 50 per cent of their savings when a “bail-in” was implemented by the resolution corporation, which is similar to what the FRDI has proposed in this Bill.

The Bill takes away the rights of depositors to get back what they deposited in full trust that their money was safe in a public sector bank as it was backed by the sovereign guarantee of the country. This provision, says Franco, goes against the fundamental right to equality, hence the Bill should be withdrawn immediately.

Banking and insurance sector employees observed a day’s strike on August 22 and held a march to Parliament House against the Bill. They have also circulated notes to Members of Parliament urging them to oppose the Bill when it comes up for debate.

According to Franco, Krishnan and other financial experts, the Bill is fundamentally flawed because it has been blindly copied and pasted from the Western model, whereas the situation in India is totally different. “In our country, there is already a resolution mechanism for all financial service providers, which is available with the Reserve Bank of India. In addition, we have also brought in an insolvency and bankruptcy code. We have also created a National Company Law Tribunal. Hence there is no need for a new resolution mechanism,” they say.

Similarly, they say, there is IRDAI for the insurance sector, and RRBs and cooperative banks have their own mechanism. In addition, the DICGC, which is a wholly owned subsidiary of the RBI, is functioning effectively.

In fact, since its inception, the DICGC had to pay only Rs.50.3 billion, whereas it had Rs.701.5 billion as deposit insurance fund as on March 2017. It also has Rs.7,16,322 million as investments. As on March 2017, the balance in the Deposit Insurance Fund is Rs.6,45,578.48 million and the balance in the Credit Guarantee Fund is Rs.7,30,027.64 million.

Except cooperative banks, no other banks have had to make claims from the DICGC. “This clearly shows that the depositors are safe in our country and there is no need for another resolution mechanism to provide deposit insurance to consumers,” they say.

But with the majority that the government enjoys in both Houses of Parliament now, it is anybody’s guess which way the Bill will go. Unless of course, the government pauses and takes stock of the situation.

Interview with Thomas Franco, general secretary, AIBOC. By V. SRIDHAR

ONE of the big ironies of demonetisation has been that the banking industry, which caught the first blast of the shock waves of demonetisation, has spoken so little about the unprecedented crisis it has undergone. Instead, the chiefs of the banks, public as well as private, have sung paeans to demonetisation even though it wrecked their business, exposed their staff to unprecedented stress and reduced the entire banking machinery in the country to nothing but glorified cash dispensers. Through all this, it was only the unions in banks that stood up to speak about how for several months banks had to virtually suspend their normal business activity in order to collect and dispense cash. And the burden of asking searching questions—from the Prime Minister, the Finance Ministry and the Reserve Bank of India (RBI)—on behalf of a hapless industry, too, fell on the unions. Thomas Franco, general secretary, All India Bank Officers Confederation, who has been an outspoken critic of demonetisation, spoke to Frontline about how Indian banking would take a very long time to recover from the battering it has suffered in the wake of demonetisation. Excerpts from the interview:

One of the lesser-known aspects of demonetisation is about the kind of pressure and stress bank employees faced, because they were the ones facing the public’s wrath after demonetisation, especially in the first three or four months.

Initially, especially on the first day, people were tolerant. They were only worried about getting some money. Although the RBI had announced that currency would be available with banks, cash had not reached most bank branches across the country. It had sent some currency to the currency chests of the specialised Currency Administration Branches of banks, in some cases about two weeks before the demonetisation announcement. Staff at the currency chests had been told not to open the boxes containing currency. I had seen that most branches had not received adequate supply of currency on the first day banks were open to the public after the announcement. The huge queues at banks meant that bank staff had to be deployed in tasks completely beyond their normal line of work—arranging shamianas for the huge crowds that had gathered at banks and generally counselling distressed people who desperately wanted some money. Chaos reigned. After about a week, people started getting angry with the bank staff.

The irresponsible manner in which the RBI kept issuing statements that adequate currency was available with banks only infuriated people even more because they started assuming that bank staff were not giving them their money. Moreover, although RBI set a limit of Rs.24,000 a week to every customer, faced with the severe shortage we had to dispense scarce currency by rationing it to much lower limits. Things got even more complicated because the RBI was making changes and amendments to its initial notification almost on a daily basis. For instance, it said higher limits were permissible for marriages. But when the actual circular reached the banks they found the complicated conditions attached to such withdrawals made it practically impossible to administer. How was a hapless customer to understand that bank staff were not responsible for not allowing them to withdraw their own money? All this meant bank staff had to face the wrath of the people for no fault of theirs. Neither the RBI nor the Finance Ministry did anything to own up responsibility for the mess they had created.

The load on banks was aggravated by the fact that ATMs had not been recalibrated to handle the new notes. I have seen senior bank employees reduced to tears by abusive customers who were desperate. There were even a few deaths of bank employees—in Bhopal, Hyderabad and other places—while on duty because of the severe stress they had to undergo. In none of these cases has the government given any extra compensation. Soon after the announcement of demonetisation, seven State Bank of India employees and their van driver died in Uttar Pradesh in an accident, but even in this case the bank management has refused to give employment to their nearest kin on compassionate grounds.

Apparently, even overtime that was to be paid to employees during the initial period has not been paid…

Yes, it has not been paid in most banks. Different banks have followed different methods for calculating the extra wages due to employees for having worked far beyond regular working hours and for having worked on holidays. The SBI paid Rs.6,000 for the first two days and Rs.5,000 for the two days following that, but nothing more after that. We are still fighting with the management for compensating us for the work we had done during the initial months after demonetisation. Some banks have paid no extra allowances at all. In several others only a token amount of about Rs.500 has been paid to employees. We raised this issue recently with the Indian Banks Association—the association representing bank managements—when we went for wage negotiations.

But banks’ expenses must have also shot up during this period, especially because they were forced to handle tasks that were peripheral to their main task as a banking institution.

Banks were saddled with huge expenses that arose as a direct result of demonetisation. Some of the senior officers at banks have also raised this with the Finance Ministry, that they need to be compensated for this. But the Ministry has simply refused to address this issue. According to one estimate, banks incurred costs to the tune of about Rs.8,000 crore. First, banks had to incur the cost of recalibration of ATMs for which they were not paid anything. Second, they had to incur higher staff and logistical costs. Third, there were costs on security and logistics that were incurred in order to manage the crowds at branches across the country. Fourth, even storing the demonetised currency meant additional storage costs and the security costs associated with it; the RBI’s failure to quickly evacuate such currency posed an additional burden.

Above all, bank staff could not do any of their normal banking work, which meant huge losses in terms of business revenue. Nobody in the government, the RBI or even bank managements would even dare to compute such losses. Banks had to abandon the follow-up on recovery of NPA accounts, nor could they pursue new business for lending. The irony is that we had huge amounts of money (because of the increase in deposits, on which banks had to pay interest), but we could not lend!

But things have not got better for banks even after the cash shortage has eased since last November.

The entire economy was hit by demonetisation. For customers, repayment of loans became difficult. Credit offtake also slowed down. Many companies are functioning at reduced capacities—at just 30-50 per cent capacity in many cases. The level of NPAs is still rising. Many of our customers—farmers, small industrialists and others—are saying that demand has not picked up even now. Obviously, these conditions are affecting the banking sector.

Looking back, what do you think was the motive for undertaking demonetisation?

In my opinion, the government was desperate to show that it was doing something. It also wanted to demonstrate that people would stand by it even if it took “tough” decisions. I do not think the government was foolish to think that black money would be wiped out by demonetisation, but it wanted to show that it was doing something to attack the menace. It is also true that, at least initially, many people believed this.