When you move a system from personality-based solutions to rule of law, there is a painful period of readjustment of the old way of doing things to the new. People, institutions and analysts all need to readjust to the new reality. The recent commentary around the Financial Resolution and Deposit Insurance (FRDI) Bill that is up for debate in the winter session of the Indian Parliament has picked up on one section (section 52) of the Bill, ignoring everything else in the 125 pages, and has resulted in panic about the safety of bank deposits if this bill gets passed. I read the Bill over the weekend and this is my understanding of what the aim of the Bill is and what it means for you.
Bank deposits are the one true friend of a middle class Indian and any threat to their safety is terribly upsetting. The government will introduce a new bill in Parliament in the winter session called the Financial Resolution and Deposit Insurance (FRDI) bill. One section of this bill is causing bank depositors to fear for the safety of their money. I read the bill over the weekend and this is my understanding of what the aim of the bill is and what it means for you.
At the 4th edition of the annual Mint Mutual Fund Conclave last week, the overarching theme was the question: should FY 2018 be called the year of the mutual fund? For an industry that just two years back was still calling itself ‘nascent’ 24 years after privatisation, it is a giant leap forward to have assets under management that have tripled in the last five years. Mutual fund assets are now one-fifth of bank deposits and almost two-thirds of the assets under management by the life insurance industry. G. Mahalingam, whole-time member of the Securities and Exchange Board of India (Sebi), in his keynote address, said that possibly the external factors that helped this growth, such as easy money policy overseas for the last few years and more recently, demonetisation, are coming to an end, and now the real mettle of the industry will be tested. He said that several regulatory measures that are coming in the days ahead will ensure that the industry is investor-friendly. One, the scheme merger announcement will be made soon by Sebi. Two, the work on the total expense ratio (TER) going down must begin. Third, investor-friendly disclosure measures such as using the total return index should be taken. “Good times are the best times to swallow bitter medicine,” he said.
If in the 1950s somebody wrote a future finance story about India, they may not have predicted the market that faces a retail consumer today. Till the 1990s, your savings and investing decisions were dependent on the government. No wonder Indian households chose gold and real estate as saving sumps. The financial sector was a reflection of the overall direction of the economy. Costs were high, service poor in state-owned and run finance. But post 1991, change came suddenly to finance and this column maps some of those changes as India celebrates 70 years of political and 26 years of economic freedom.
This would easily qualify as one of the worst moments of your life. That ping which says: your account debited with Rs30,000, and your current balance is now Rs2,467.20. Your blood chills and hands shake as you realise that you’ve been robbed—this is not a transaction you just made. Did I schedule a payment and forget about it? Did my spouse, who has my personal identification number (PIN), make a transaction? But I did not get a one-time password (OTP). You feel exactly the same way as you would, had somebody physically snatched your purse out of your hands. Robbery leaves the same feeling of disbelief and damage, whether it is virtual or not—the loss is very real.
While the loss you take home when cash is ripped out of your hand is yours, the responsibility is that of the bank when it happens in the virtual world. The banking regulator, Reserve Bank of India (RBI), has taken forward the draft it had released in August 2016 that thought through liability issues of electronic theft of money. The bank will now have to make good your entire loss if it happens through an unauthorized transaction or if the electronic theft happens due to a fault within the bank’s systems. You don’t even need to report this. For instance, when the data of nearly 3.2 million debit cards was compromised between May and July 2016, it was due to a virus in the systems of Hitachi Payment Services, the firm that manages the bank’s ATM network. In an event such as this, you do not have to report the loss of money, the bank will have to make good on it because its system failure caused the loss and many people are affected.
I don’t think there will be many people in urban India who do not have a bank mis-selling story to share. The systemic use of bank branches to mis-sell life insurance products and to churn mutual fund portfolios is now part of the urban Indian discourse. The problem is not new. I remember first raising the issue of banks mis-selling insurance and mutual fund products in 2007 with one deputy governor of the Reserve Bank of India (RBI). I was treated to lunch and anecdotes from those in the room of how people close to them were ripped off by banks. In fact, subsequently, in every committee I served on—Swarup Committee 2009 (bit.ly/2tLat6F) and Bose Committee 2015 (bit.ly/2rS3xmK)—the offline conversations included stories of bank branches turning into dens of tricks and traps. I’ve raised the issue of mis-selling with RBI, and with the ministry of finance, and so have others who work in this space, most notably Moneylife magazine (bit.ly/2t7r5HJ and bit.ly/2sHtN6b), which has raised it on multiple occasions. But the messaging that came down from the towers of oblivion on Mint Street was always the same: not our problem; let the sector regulators deal with this.
Why do the world’s most value-for-money people choose a pre-tax 4% return on the money that they leave in their savings deposits? It is the twin advantage of safety and liquidity that makes people love their savings deposits. But an aggressive mutual fund industry is using new products and processes to offer alternatives to these deposits, and is taking the battle for the share of the household savings right to the door of banks. Remember that mutual funds have product categories that can look after most of your money management needs—from liquid money to building and milking retirement funds. Last week, the Securities and Exchange Board of India (Sebi) announced a series of rule changes that make it safer and easier for investors to shift from a bank savings deposit to a liquid fund and allow people to use their e-wallets to invest in funds.