FRDI Bill-Misusing tax payers money to benefit corporate sectors

Finance Ministry’s assurances are illusory - By Major General S.G.Vombatkere (Retd.)

The Financial Resolution and Deposit Insurance (FRDI) Bill 2017, is intended to resolve the financial distress that may develop in financial institutions (called “financial service providers”), specifically in banks.

It is also intended to provide a basis for providing depositors in banks with a degree of assurance that a specified minimum of deposits will be secure in the event of a financial crisis in the bank. The method of doing this is by raising a Resolution Corporation (RC) with appropriate powers.
Since this is about banks and their financial stability, it is well to note that banks survive by providing loans and earning interest on the loans provided. The capital for providing loans is from institutional and individual depositors, both small and large, who as creditors, earn interest on their deposits from the bank.

The bank uses its capital to provide loans. Simplistically put, when interest is not paid by a borrower, the bank takes measures to recover the interest and the principal. These measures include recovering the security based upon which the loan was provided, issuing legal notice to the guarantor to pay up, legally auctioning the borrower’s property to realise the moneys due, and taking civil or criminal action against the borrower.​

According to one estimate, GoI has been providing the big corporations tax holidays by excusing corporate income tax and excise and customs duties of around Rs.90 lakh-crores in the 11-years period 2005-2016, reflected as “Revenue foregone” in successive budgets.

Benefit to the corporate sector through “Revenue foregone” is merely one half of the dodgy benefit to the corporate world. The other half of the dodge is providing enormous loans to the beneficiaries of “Revenue foregone” in the name of boosting the industrial sector in pursuit of the Holy Grail of economic growth. And when these loans are not serviced, the bank either declares the loan as a non-performing asset (NPA) or else proffers another loan which is used to pay back the earlier loan (this is termed “re-financing”), so that the NPA is taken off the books.​

Of course, the names of corporates which avail the holiday on corporate tax and excise and customs duties may not all figure among the names of defaulting borrowers, but many really big corporates benefit by tax holidays and also borrowing money which become NPAs which are then written-off. Impeccably smart footwork by successive finance ministers in consultation with their prime ministers, to keep the corporates in good spirits, using public money! Today, PSBs are finding it difficult to lend because around 40 large corporate groups owe around Rs.10 lakh-crore rupees.

That borrowings from PSBs are used by big corporates to finance mega-projects which cause population displacement, impinge adversely on the environment, and exacerbate global warming and climate change, is another dimension which is outside the scope of the present article.​

And so we come to the matter of resolution of financial crises and insurance for the deposits made in banks by members of the public, which is the reason for the FRDI Bill, 2017.​

The FRDI Bill caused fears among depositors principally due to the implications of the bail-in option available to the Resolution Corporation.​ It is bad enough that the bail-out process using tax-payers’ money to balance the books of banks which have huge NPAs is being used, instead of recovering dues from borrowers and punishing colluders and connivers among bank staff and MoF staff.​

WE AS PUBLIC CITIZENS NEED TO STRONGLY OBJECT TO THIS AND STAND TOGETHER TO SEE THAT THIS BILL DOES NOT SEE THE LIGHT OF THE DAY WITH THE BAIL IN CLAUSE!!