The Financial Resolution and Deposit Insurance (FRDI) Bill has been creating a lot of hype among the customers. Currently, the bill is under consideration of the joint parliamentary committee. Read on to find out important clauses and provisions of the bill:
In simple words, the FRDI bill aims to set up a resolution corporation that will observe financial companies, organize them as per risk profiles. Furthermore, they will step in to prevent them from going bankrupt by noting their liabilities. This bill by the Centre is a more comprehensive approach towards systematic resolution of all financial firms such as banks, insurance companies and other financial intermediaries.
In 2008, the financial crisis witnessed highest number of high-profile bankruptcies which has resulted in this bill. The government is also encouraging citizens of the country to get more involved in the banking sector. Hence, it becomes important to protect savers and those joining the proper economy in case a bank or insurance firm starts dwindling.
Laws on resolving bankruptcy situations
The Indian Finance Minister, Mr. Arun Jaitley was the first one to propose such a law in his 2016-17 budget speech where he stated the lack of laws on resolving bankruptcy situations in financial firms.
The bill will set up a Resolution Corporation (RC) that will have representatives from all financial sector supervisors. The RC or the sector supervisors will put in place few rules that will categorize the financial firms into five categories based on their risk of failure: low, moderate, material, imminent and critical risk to feasibility. The assessment of the risk will be based on the metrics of capital adequacy, assets and liability, asset quality, capability of management, earnings sufficiency, leverage ratio, liquidity of the firm and so on.
The fear for the bill
The fear for the bill stems from the Bail-In clause which majorly authorizes the resolution corporation to rescue a deteriorating financial firm through the help of creditors and depositors money. This can be achieved by cancelling the bank’s liabilities or altering them into other forms, such as equity.
This clause has instilled fear among the depositors as they are concerned that they may lose their hard-earned money deposited in the banks. Bail-Ins can be appealed only if you had given prior consent at the time of signing the deposit forms. A small amount of Rs. 1 lakh of bank deposit is insured in case the bank files bankruptcy.
Not left in a bad position
Whatever decision that Resolution Corporation (RC) takes, the law confirms that all creditors (including depositors) are not left in a bad position. Today, the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures bank deposits up to Rs1 lakh. Moreover, the RC will also insure bank deposits and the insured limit will be set post the discussion with the RBI.
We have been a witness to many financial failures in the past and they have been only resolved by the involvement of the government working simultaneously with the sector supervisors.
India needs a strong and sharp system that makes the banks more responsible and is able to give signals early on of any financial ill-health, without exposing depositor’s money to more risk than they can face.