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Govt: Bail-In Clause Would Not Be Applied To PSBS, and It Would Be A Tool of Last Resort

The document discusses India's proposed Deposit Insurance and Credit Guarantee Corporation (DICGC) bill. It notes that the bail-in clause would only apply to private sector banks as a last resort, and that cancellation of deposits over the insured amount requires depositor consent. The resolution corporation's use of bail-in powers would be subject to government oversight. Depositors could receive compensation from unreasonable bail-in actions. It also discusses concerns around implicit guarantees for public sector banks creating moral hazard, and whether private bank customers deserve the same protections. RBI was worried about overlapping regulation.

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Singh Jagdish
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38 views1 page

Govt: Bail-In Clause Would Not Be Applied To PSBS, and It Would Be A Tool of Last Resort

The document discusses India's proposed Deposit Insurance and Credit Guarantee Corporation (DICGC) bill. It notes that the bail-in clause would only apply to private sector banks as a last resort, and that cancellation of deposits over the insured amount requires depositor consent. The resolution corporation's use of bail-in powers would be subject to government oversight. Depositors could receive compensation from unreasonable bail-in actions. It also discusses concerns around implicit guarantees for public sector banks creating moral hazard, and whether private bank customers deserve the same protections. RBI was worried about overlapping regulation.

Uploaded by

Singh Jagdish
Copyright
© © All Rights Reserved
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Download as DOC, PDF, TXT or read online on Scribd
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Govt: Bail-in clause would not be applied to PSBs, and it would be a tool of last resort —

when M&A is not viable — in case of private sector banks. GoI reiterated its implicit
guarantee for solvency of PSBs. Cancellation of liability of depositor beyond insured amount
will be possible only with prior consent of depositor. Bail-in instrument designed by
Resolution Corporation, will be subject to Government scrutiny and oversight of Parliament.
In case of injudicious and unreasonable exercise of bail-in power by Resolution
Corporation, affected depositors will have right to get compensation from Resolution
Corporation on an order of NCLT.

Deposits up to $250,000 are protected by insurance in the U.S. while the figure is $1,15,000
in the U.K. But the accurate comparison should take into account the average income in a
country. Deposit insurance limit is 3-4 times the average income levels in the U.K. and the
U.S. In the case of emerging countries like Brazil and China, the insurance limit is 9 times the
per capita income. Compare that with India where the insurance limit is actually a little less
than its per capita income. Further, there should be provision for a periodic review to raise the
quantum of deposits covered by insurance. With private sector banks gaining market share in
loans and deposits, a higher deposit insurance amount in the Bill goes in favour of depositors.

GoI spoke of implicit guarantees for deposits in PSU banks. There are two problems: 1)
Implicit guarantee cannot be emphasised beyond a point lest it creates a moral hazard. 2)
What about private banks who hold 25% share of total deposits in the country? Are their
customers not deserving of the same protection from the government?

RBI was worried about ‘dual oversight’ and who will actually take the call on when a bank
is failing.

2018: Govt sees no moral hazard in recapitalising a bank with customers’ deposits while
the owners of banks are granted immunity by the ‘limited liability’ of a corporate
identity. The bill aims at financial stability through the lens of an accountant.

According to the December 2017 Financial Stability Report, if customers of 54


commercial banks in India were to withdraw 15% of their uninsured deposits, 18 banks
would fail to repay the deposits of customers.

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