November 28, 2017

This Tsunami will wipe out your money lying in the Banks

1. Banks, the world over, get into problems, when the loans advanced by them are not repaid on time, by the borrowers. When the economy is in a slow-down, many of these borrowers go belly up and become NPAs.

2. Normal banking prudence suggests that the banks should auction the assets given by the borrower as security, at the time of taking loans. Generally banks insist on 150% security of the loan amount. For example, if a borrower wants Rs.100 as loan, he has to provide security worth Rs.150 before availing the loan.

3. However, for big borrowers, every norm is flouted and when they become NPAs like that of Anil Ambani in Telecom, you are talking of outstanding dues worth Rs.45,000 Cr. Now the question is, who will replace the funds, that were loaned to him.

4. Today the NPAs of Indian Banks, amount to over Rs.10 Lac-
Cr. Jaitly or Urjit Patel do not give the actual figures. To rescue these banks, the Govt. has 2 options. They are called "bail-out", which means the Govt. uses the taxpayers' money to fund the bank. This is very wrong but it has now been happening, quite regularly in India,

5. The other monstrous option is called "bail-in". The is the term that forms the very pivot of this post and has never been resorted to, in our country earlier. Now what is "bail-in". The dictionary meaning of "bail-in" is - "rescuing a financial institution on the brink of failure "by making its creditors and depositors" take a loss on their holdings". A bail-in is an internal process and is the opposite of a bail-out, which is external and handled by Govt. with budgetary allocation.

6. You just deposit your money in a bank as a "Savings Deposit or Fixed Deposit" to use it whenever you want. You have no clue as to how well the bank is managed. Now Modi & Jaitely have got a bill approved by the Cabinet called "The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017" and this has now been referred to a Joint Parliamentary Committee before getting it passed in the Parliament.


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