Punjab National Bank’s share value has taken a swift downturn in the wake of Nirav Modi scam said to be worth more than Rs 20,000 crore. This has also raised questions on the regulation capabilities of government-owned banks for handling the income taxpayers’ deposit money.
Nirav Modi Escape:
Frauds in the banking industry are not new to India. Unfortunately, the government in recent years has not been able to bar such swindlers such as Vijay Mallya, Nirav Modi, etc. from leaving the country despite their history of committing such frauds.
In most cases, it begins with big businessmen taking huge loans and not paying them back later. Ultimately, it’s the common income tax payers and depositors who have to take the brunt of such lax scrutiny
As a countermeasure, the government has introduced a new law proposal – the Financial Resolution and Deposit Insurance (FRDI) Bill. FRDI bill is being studied by a Parliamentary Standing Committee and aims to “establish a framework to carry out the resolution of certain categories of financial service providers in distress” and “to provide deposit insurance to consumers” of these services. Thus, reads the Preamble to the Bill.
At the Income Taxpayer’s Expense
It also seeks to set up a Resolution Council to monitor, classify and identify institutions at risk of failure. Banks, insurance firms with high NPAs and bad debts, will now be pulled up based on accounting red flags.
Despite the government’s claim that FRDI will help in protecting banks, it remains to be seen how it may affect small depositors.
- It has the power to convert people’s deposits into bank’s equity shares. This measure can be taken when the bank faces a credit and credibility crisis.
- FRDI bill, if it becomes a law, can change the nature of deposits from one class to another. This could change the interest rate or the tenure of deposit. This means that the autonomous power of banks has increased in terms of savings decisions for the depositors.
- With this bill, a bank can put a stay on a depositor’s right to withdraw deposits before maturity.
- It also allows a bank to place a suspension on the payment of interest or the disbursement of deposits on maturity.