This is from FB. Shri K T Rajagopalan, a retd G M of SBT and a sensible banker, has written the following:
[It is perhaps a sign of the times that anything that one writes has to be preceded by a caveat, if such be the case (as in mine) that one is neither a Modi-fan nor a Modi-baiter, that what follows the caveat is what one considers an objective look at the issue.]
I believe that the hullabaloo being raised about the proposed 'Bail-in Bill' (because of the apprehension that the hard-earned money the depositors had squirreled over a lifetime will be palmed off to recalcitrant borrowers) is a lot of bunkum. There are other, and much more valid, reasons to object to the proposed legislation which we will come to in a while, after allaying the fear that the deposits will go into the black hole.
First of all, when you place a deposit with a bank, it is repayable on demand in the case of current accounts, subject to certain conditions in the case of savings accounts and after the agreed tenure in the cased of fixed deposits, by whatever name they are known. Repayment of bank deposits, unlike unsecured debentures of companies, is not contingent on the bank’s capacity to repay them or its profitability.
Secondly, though one of the major resources of a bank for its lending activity is deposits, if any loan has to be written off, it has to dip into the 'owned funds or 'own resources' (capital and reserves) including the shareholder's money - not the depositor’s money. In the case of public sector banks, the union government is the major shareholder and write-offs done by banks would certainly affect you and me - not in our capacity as depositors but as taxpayers. In the case of private banks (irrespective of whether they are old generation banks or new), it is the promoters' capital that will get eroded.
What happens when the capital and resources are fully eaten up by the bad loans? Good question.
Like any company that cannot meet its commitments by disposing of its assets, it folds up. Well, the situation of a bank going bankrupt is, semantically speaking, a rather comical one, but it CAN happen. It is to prevent this that several checks and balances like Basel norms and capital adequacy ratio have been put in place. Despite all these precautions, the worst is still possible.
In such a situation, the chances for which are remote, a bank can indeed throw up its hands and say that it is in no position to pay its depositors. The government and the central bank of the country will not stand watching the spectacle of a bank - public or private, new or old generation - defaulting on its deposit commitment, and facing a winding up situation, for, the confidence of not just the banking public, but the entire world, in the economy of the country would be eroded. It will be like a country reneging on a sovereign debt and that would be a nightmare for any self-respecting central bank or government.
So, is the 'Bail-in Bill' non-toxic? Certainly not. It will enable selected cronies to seek remission of bank loans on the plea that they have gone bust. And then the tax that we have paid will go to fill the gap - call it nursing, rehabilitation or recapitalization - and if that is not enough, more tax proposals will be heaped upon the unsuspecting taxpayer in the form of a Kingfisher Cess or a Bhushan Steel Surtax or an Essar tax!
Thus the heat and dust that is being raised about the proposed legislation, in my view, is justified, but not for the reason that the money of the depositor is at risk. The protest is justified for the reason that the legislation rewards the bank loan defaulters, making the disciplined borrower look like a fool. It needs to be nixed because it will encourage more borrowers to default and nurture the 'culture' of default.
The execution of the well-intentioned demonetization exercise was botched up beyond belief. The GST reform is yet to stabilize and meanwhile unscrupulous retailers are exploiting the opportunity given to them on a silver platter to cheat the last mile consumer. The harassment the common man is being subjected to in the name of linking the Aadhaar card to every conceivable account (bank, demat, PPF, KVP, NSC, insurance policies, mutual funds, etc) and card (credit, debit, ATM, ration - mercifully new year cards and visiting cards are exempted!) is another horror story one shudders to think about. This, at a time when technology can do this with the least inconvenience to the investor.
Given this record of the government in putting the layman to avoidable hardship, can he be faulted for suspecting that one more blow is about to be administered to him? This explains the hyperventilation of apprehensions that is rending the air.
(I am obliged to my good friend Shri C M Pillai, former General Manager, SBI for some of the ideas expressed here.)
And Gurumurthy is against Basel norms.
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