6 January 2018

What is the Financial Resolution and Deposit Insurance Bill 2017

What is the Financial Resolution and Deposit Insurance Bill 2017
The FRDI Bill seeks to decrease the time and costs involved in resolving distressed financial entities
The Union Cabinet, chaired by Prime Minister Narendra Modi, has approved the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 to be introduced in the Parliament. This Bill is similar to the Insolvency and Bankruptcy Code, 2016, which was enacted last year in May. Both of these are about issues that can arise when companies go bankrupt or insolvent, except that this Bill deals only with the companies that are in the financial sector. The insolvency code Act deals with companies in all other sectors. The FRDI will provide a comprehensive resolution framework to deal with bankruptcy situations in financial sector entities such as banks and insurance companies. Let’s read more about the Bill.
In his 2016-17 budget speech, Union finance minister Arun Jaitley said, “A systemic vacuum exists with regard to bankruptcy situations in financial firms. A comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17.” Following the announcement, on 15 March 2016, a committee was set up under the chairmanship of Ajay Tyagi, additional secretary, Department of Economic Affairs, Ministry of Finance, to draft and submit the Bill. The committee also had representatives of the financial sector regulatory authorities and the Deposit Insurance and Credit Guarantee Corporation.
The committee submitted its report and based it the draft FRDI Bill was drawn up. The finance ministry sought comments on the Bill till 31 October 2016 and after consideration of the suggestions, the Union Cabinet approved it to introduce it in the Parliament.
What the Bill offers
According to the finance ministry, FRDI Bill, 2017 seeks to protect customers of financial service providers in times of financial distress.
It also aims to inculcate discipline among financial service providers in the event of financial crises, by limiting the use of public money to bail out distressed entities.
The Bill would help in maintaining financial stability in the economy by ensuring adequate preventive measures, while at the same time providing the necessary instruments for dealing with crisis events.
The Bill aims to strengthen and streamline the current framework of deposit insurance for the benefit of retail depositors.
Further, it seeks to decrease the time and costs involved in resolving distressed financial entities.
Once enacted, a resolution corporation will be setup to strengthen the stability and resilience of the entities in the financial sector.
What the Bill seeks to do
The FRDI Bill is part of a larger, more comprehensive approach by the Centre towards systematic resolution of all financial firms — banks, insurance companies and other financial intermediaries. The Bill comes together with the Insolvency and Bankruptcy Code to spell out the procedure for the winding up or revival of an ailing company.
The need for a specific regulation rose following the 2008 financial crisis, which witnessed a large number of high-profile bankruptcies. With the Centre also actively encouraging people to engage more with the banking sector — both through schemes like Jan Dhan Yojana and moves like demonetisation — it becomes critical to protect savers and those joining the formal economy in case a bank or insurance firm starts failing.
The Bill’s main provisions
The Bill provides for the setting up of a Resolution Corporation — to replace the existing Deposit Insurance and Credit Guarantee Corporation — which will be tasked with monitoring financial firms, anticipating their risk of failure, taking corrective action and resolving them in case of failure. The corporation is also tasked with providing deposit insurance up to a certain limit yet to be specified, in the event of a bank failure.
The Corporation will also be tasked with classifying financial firms on their risk of failure — low, moderate, material, imminent, or critical. It will take over the management of a company once it is deemed critical.
Concerns abound
Among other tools, the FRDI Bill also empowers the Corporation to bail-in the company. While a bail-out is the use of public funds to inject capital into an ailing company, a bail-in involves the use of depositors’ funds to achieve those ends. This can be done either by cancelling the bank’s liabilities, or converting them into other forms, such as equity.
This has caused a lot of concern among depositors who are worried they may lose their hard-earned money deposited with banks. However, the fact is that the risk is no more or no less than it ever was. The Deposit Insurance and Credit Guarantee Corporation provides deposit insurance of up to ₹1 lakh. The rest is forfeited in the event of a bank failure. The FRDI Bill has not specified the insured amount yet, but it is unlikely to be lower than that amount, as the limit was set way back in 1993.

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