Of FRDI Bill and PNB Debacle

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Only two months before the Nirav Modi scam, Narendra Modi at FICCI’s 90th Annual General Meeting claimed that the money of depositors is safe in banks and that rumors are being spread about the safety of such money in the banks. He was referring to the controversy created due to some controversial provisions of the proposed Financial Resolution and Deposit Insurance Bill, 2017, which the present dispensation, tried to introduce in the previous session of the parliament. But, due to stiff opposition in the political and economic circles, the bill was referred to a joint parliamentary committee for review and necessary changes. However, in the light of recent scheme of things going on in the financial arena, the bill is destined to die a silent death.
The recent PNB debacle that stormed the Indian banking sector has left a blot on the functioning of the same. The Mumbai branch of PNB has advanced money to diamond wizard Nirav Modi, prime accused in the fraud amounting to more than Eleven Thousand four hundred crores which is likely to swell more, in league with some of the erring employees of the branch by issuing fake Letters of Undertakings. LOU is an undertaking provided by one bank to another bank, in favour of or on behalf of a customer. Simply put, in the Indian context, an LOU is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank’s foreign branch in the form of a short term credit.
FRDI Bill provided for bail-in provision where the banks can use the money of depositors by converting that into equity or cancel the liability owed by them and thus escape of such debt when in crisis. The experts expressed their dissent to the provision, reason the ruling will provide a ground to the banks to indulge in frauds. And, the PNB fraud has provided a backing to their opinion to oppose the proposed bill. Also the government is caught on the wrong foot backing every concern of people to doubt the policies and the hidden motives behind such moves.
The PNB debacle has left thousands of investors in distress with huge amounts of money wiping out of stock markets, thus shaking down investor confidence and bringing it to lowest levels. The SENSEX has crashed down almost 1000 points since the fraud was detected. Almost all the bank stocks are trading in red. But above all, people who have been saving their money are now questioning the credibility and reliability of public sector banks which were deemed to be immune to such plunders.
Although at the time of introducing the FRDI bill, the government tried to brand it as an ultimate solution to the worries surrounding the financial institutions and corporations mainly the banks, but Nirav Modi scam has punctured the whole claim and instead, the slogan of government being pro poor is in question.
Even if the FRDI bill is junked, the government needs to take a series of steps to boost investor confidence and restore the trust of people on banks. At the very outset, stringent laws pertaining to immigration need to be made through which the fraudsters can find it very difficult to flee out of the country. This has been the case with India, that the defaulters flee out of country and enjoy immunity in foreign countries and thus evading the prosecution from Indian courts. In addition to this, the government should immediately pass the proposed Fugitive Economic Offenders Bill, 2018 (although approved by cabinet) with the help of which fraudsters would be forced to return to India to face trial for scheduled offences and also the property of fugitive economic offender whether in India or abroad would be confiscated and accordingly disposed of under the Act. Also, the insurance on deposits need to be raised more beyond the existing limit so that a large number of middle income group savers are covered by insurance. Moreover, in order to ensure greater monetary discipline, the Reserve Bank of India must act strongly and swiftly against the banks which are not complying with the rulings of the Apex Bank as prescribed from time to time.

— The author is Assistant Professor of Commerce at Government Degree College, Tral. He can be reached at: aadil.rehman168@gmail.com