THE HINDU Editorial Vocabulary- December 5, 2017- Topic 1

Bail-in doubts — on financial resolution legislation

Finance Minister Arun Jaitley has wisely sought to allay fears about a “bail-in” clause in the Financial Resolution and Deposit Insurance Bill, 2017. Introduced in Parliament this August, it has caused great anxiety about the safety of funds parked by millions of households in bank deposits — fears that it will enable banks to be ‘bailed in’ by depositors’ funds rather than being ‘bailed out’ by taxpayers (or potential buyers). 

The government has promised a ₹2.11-lakh crore recapitalisation plan for public sector banks that are now taking haircuts on defaulted loans being put through the Insolvency and Bankruptcy Code. When banks, in turn, face collapse, the fear is that depositors could face similar haircuts or write-downs on the value of their savings in the bank and perhaps be issued securities instead. This provision in the FRDI Bill is purportedly with an eye on resolving bankruptcy scenarios among financial entities, some of which could be too big to fail or systemically important. On Friday, Mr. Jaitley said a ‘lot of corrections’ could still take place; the Bill is currently being reviewed by a parliamentary committee whose report will be considered by the Cabinet. The Bill proposes the scrapping of the Deposit Insurance and Credit Guarantee Corporation (set up in the early 1960s in the aftermath of the collapse of two banks), which guarantees repayment of bank deposits up to ₹1 lakh in case a bank is liquidated. A new Resolution Corporation under the Finance Ministry will steer financial entities out of the woods and offer a similar cover for deposits. The silence of the Bill on the extent of deposits to be guaranteed is a key source of concern, and may necessitate the need to revisit the existing ₹1 lakh deposit guarantee, which hasn’t been revised since 1993.

The need for a specialised regime to cope with large financial firms on the verge of going bust is well-understood especially since the global financial crisis of 2008. As a resolution tool for stressed financial firms, the bail-in clause has been the subject of much debate, but it remains the least well-established across the world. Even the committee framing the FRDI law has noted that it should typically be used where continuing a firm’s services is considered vital but its sale is unviable — not as a lazy default option. If lenders don’t believe that a bail-in plan would salvage a firm, triggering the clause could end up causing a run on the bank instead of preventing one. With its thrust on initiatives such as the Jan Dhan Yojana and demonetisation, the government has nudged more people towards the formal banking system. To ensure that those gains are not lost, the government must communicate more clearly the rationale behind the bail-in provision, and the circumstances in which it may ultimately be used, if at all. Most importantly, it must enhance the amount of bank deposits that will remain safe under the new dispensation.

Vocabulary

Allay: diminish or put at rest fear, suspicion, or worry.

Example: The report attempted to educate the public and allay fears

Synonyms: reduce, diminish, decrease, lessen, assuage, alleviate

Anxiety: a feeling of worry, nervousness, or unease, typically about an imminent event or something with an uncertain outcome.

Example: He felt a surge of anxiety

Synonyms: worry, concern, apprehension, apprehensiveness, uneasiness

Insolvency: Inability to pay one's debts.

Example: The club was facing insolvency

Bankruptcy: the state of being bankrupt.

Example: Many companies were facing bankruptcy

Synonyms: insolvency, liquidation, failure, ruin, financial ruin

Perhaps: used to express uncertainty or possibility.

Example: Perhaps I should have been frank with him

Synonyms: maybe, for all one knows, it could be, it may be

Purport: appear or claim to be or do something, especially falsely.

Example: She is not the person she purports to be

Synonyms: claim to be, profess to be, pretend to be, appear to be

Scenario: a written outline of a movie, novel, or stage work giving details of the plot and individual scenes.

Example: Imagine the scenarios for four short stories

Synonyms: plot, outline, synopsis, storyline, framework, screenplay

Scrap: a small piece or amount of something, especially one that is left over after the greater part has been used.

Example: I scribbled her address on a scrap of paper

Synonyms: fragment, piece, bit, snippet, shred, offcut, oddment

Aftermath: the consequences or aftereffects of a significant unpleasant event.

Example: Food prices soared in the aftermath of the drought

Synonyms: repercussions, aftereffects, consequences, effects

Necessitate: make something necessary as a result or consequence.

Example: The severe arthritis eventually necessitated a total hip replacement

Synonyms: make necessary, entail, involve, mean, require, demand

Unviable: not capable of working successfully.

Example: The commission found the plan to be financially unviable

Thrust: a sudden or violent lunge with a pointed weapon or a bodily part.

Example: He drove the blade upward with one powerful thrust

Synonyms: shove, push, lunge, poke

Rationale: a set of reasons or a logical basis for a course of action or a particular belief.

Example: He explained the rationale behind the change

Synonyms: reason, reasoning, thinking, logic, grounds, sense

Enhance: intensify, increase, or further improve the quality, value, or extent of.

Example: His refusal does nothing to enhance his reputation

Synonyms: increase, add to, intensify, heighten, magnify, amplify

Dispensation: exemption from a rule or usual requirement.

Example: Although she was too young, she was given special dispensation to play two matches

Synonyms: exemption, immunity, exception, exoneration