How Safe is Your Money in the Vault?

People in India believe that the money they deposit in a bank is absolutely secure whereas in reality, if the bank faces any kind of issue say robbery, you might never get your money back.According to reports, IL&FS owes nearly Rs. 1 lakh crore to creditors, mutual funds & pensioners. Mortgage lender DHFL owes more than Rs. 85000 crores to other financial firms & depositors. The total outstanding bilateral exposures among the entities in the financial system rose 15.4% to Rs. 36.3 lakh crore in march 2019. About 46% was accounted for by banks & by mutual funds, 14.5%,12.7% by NBFCs & 8.7% for mortgage lenders.

India had begun to follow the regulators across the world, that is, avoiding quick actions in these matters instead of crisis management formula, but was highly resisted by scared depositors & political noise around ‘bailing-in’ failing banks with depositor funds. Until two decades ago, India’s banking was almost state owned with a big chunk of the deposits consumed by the state itself and the rest was lent to the industries. Since then, the financial markets have expanded, creating a complex web, but the deposit insurance lingered where it was. Another issue is that all the institutions are regulated by different entities & collapse of one has a domino effect on the rest.

The bedlam in the financial markets where banks, non-banks & mutual funds are adjusting to different directions to recover what is due to them is the perfect motive to revive the Financial Resolution & Deposit Insurance (FRDI) bill,2017. The FRDI bill states that the financial firms are dissimilar & should be handled individually. It aims for setting up a resolution corporation (RC) that will identify early warning signs of distress at financial institutions. There is a lot of misinformation around the bill-in clause and the bill got into immense hullabaloo and never saw the light of the day. Perhaps, it’s time to reconsider its implementation.

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