Bailing out before bailing in becomes law.

"People have made a run on banks, withdrawing money from ATMs and banks fearing the banks could collapse due to scams that have come to light recently and a provision in the Financial Resolution and Deposit Insurance (FRDI) Bill 2017. Even though there is no risk to banks due to either of these factors, a prolonged bank run can affect banks adversely," was a news report. ATM machines have been shut down because of lack of cash and banks are allowing withdrawal of up to Rs 20,000-40,000 per person per day. This probably reinforces fears that banks are trying to prevent withdrawals because they are bankrupt. People are queuing up to withdraw money prematurely from fixed deposits. The Finance Minister has assured people that their deposits are protected but people do not believe him. The FRDI Bill 2017 is meant to address bankruptcies in financial services providers, like banks. The bill contains a 'bail in' clause, which means that the failing company has to use its own assets, including depositors money, to pay its debts. This is opposed to a 'bail out' clause which means rescue by a third party, usually the government. Most other countries have a bail in provision to prevent use of taxpayer money to save banks, especially after the financial crisis of 2008, when governments bailed out banks considered too big to fail. In fact, India has had a similar provision since 1993 which protects a total of Rs 100,000 of deposits a person has in any particular bank. However, previously the government has protected depositors even of failing private banks. Thus, in 2003 the Punjab National Bank, a public sector bank, took over Nedungadi Bank and in 2004, another public sector bank, the Oriental Bank of Commerce, took over the failing Global Trust Bank. Since the government is the majority owner of public sector banks it protected depositors from losing their money. Why are people taking their money out of public sector banks despite reassurances from the Finance Minister. Probably because people have lost their trust in this government after the sudden demonetization of of high value notes in 2016. Yet a survey in 2017 found that 85% of Indians trust the government. This makes the present run on banks in Andhra Pradesh and Telengana inexplicable. In the absence of a social safety net Indians tend to save a high proportion of their income, though it has fallen from a high of 36.82% of GDP in 2008 to 29.98% in 2017. If people withdraw their money they will invest it in gold, real estate or keep it in cash. Banks will have less money to lend and the current account deficit, which is the difference between savings and investment, will go up. Trust is like Humpty Dumpty. You cannot put it together once it breaks.