This bill will:

  1. Destroy your trust in Banking system

  2. Allow big corporates to run from their NPAs

  3. Destroy the economy

In early 1960s, Military Government wrested power over Myanmar (then Burma) after staging a coup d’état. First thing they did was to nationalise banks and put severe illogical restrictions on deposit and withdrawal of money in bank accounts. Citizens were allowed to hold only one account in one bank; and was not allowed to deposit more than K10,000 per month or K50,000 per year; make more than two withdrawals per week; and further restricted to withdraw more than 10 per cent of account at once.

Rings a bell?

This destroyed citizens’ and businesses’ trust in banking system. This paranoia was visible even till a few years ago. People started holding cash in physical form instead of depositing it in bank. This destroyed the banking system totally and even today vast majority of people are skeptical to deposit their money in bank and transact through banking channels.

Narendra Modi government has proposed The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI) that would allow bail-in option, which means depositors could lose control of their money – essentially be forced to bear a loss on their holdings. Thus depositors would have to pay for fraud and inefficiency of bank officials, management, and mandarins in Finance Ministry due to whom PSU Banks are suffering from overhang of NPAs. In case the losses are much larger and financial situation of banks worsen, deposits would be converted into equity shares in the bank. This means that investors who invested in bank deposits for lesser and steady returns from fixed income securities will be forced to take equity risk.

This is a death knell for banking system in India with people moving their money out of financial assets and moving it in real tangible assets like real estate or gold or investing them through informal system like Bisis, Chit Funds, etc. This will also destroy public trust in banking system and can result in mass panic withdrawal of money from banks leading to plausibility of banking reaching the point of collapse and insolvency. This will be an intentionally engineered crisis.

I believe this could also be a modus operandi to create a situation enabling the Government to reprivatize PSU Banks, and that too at a valuation which is a fraction of its real value. Banks could be sold off to private and foreign banks for a song in the name of saving the banking system, while allowing new buyer to force a haircut on depositors and using their money to restart banking business of the bank.

While Modi is talking about Make In India, he is ill advised to pursue this idea. Destruction of banking and financial services sector will starve industry of much required capital. In other words, Modi is working overtime to ensure that Make In India doesn’t take off and local entrepreneurs will be forced to stop doing business.

This is one of the most ill-thought plan ever produced by any human. This is more draconian than demonetisation and can only be compared with the Land Acquisition Bill tabled by Modi and was finally trashed in wake of massive opposition.

I am of the opinion that this proposed bill deserves severe opposition and Modi deserves to be condemned for allowing such a stupid idea — that has the potential to destroy financial sector — to fly in the system.

I am no supporter of Government being in business and managing PSUs. I strongly believe that PSUs must be sold off and monies earned on sale of shares must be used to invest in infrastructure and retire debt. However, I am strongly against such model of creating banking crisis and using that to destroy valuations and selling PSU Banks for a song.

I also strongly believe that such modus operandi to recoup losses arising from NPAs is unviable, because it does not punish bank officials and bureaucrats who sanctioned those loans and industrialists who siphoned this money and are enjoying. What we need is criminalisation of directors of defaulter companies and relatives of those directors and also criminalisation of bank employees and financial ministry officials who appointed directors in banks. Today I dont see anybody’s skin in the game in PSU Banks.

That has to change.

Most importantly this proposed bill has to be opposed and Modi must be forced to trash this bill.

-Sumeet Mehta

Sumeet is a Chartered Accountant by qualification with more than 13 years experience in corporate finance, strategic corporate advisory, investment research and investment advisory.

He bring with him a rich and rounded experience in equity research, investment banking, debt syndication, and tax and corporate laws.

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