Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 (Important) (Download PDF)

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The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill) replaces existing resolution regime to provide a comprehensive resolution regime which ensures, in the rare event of failure of a financial service provider, a system of quick, orderly and efficient resolution in favour of depositors.

 Image of Frdi Bill

Image of Frdi Bill

Image of Frdi Bill

Proposals in the FRDI Bill for the Depositors

  1. The FRDI Bill establishes a Resolution Corporation and a comprehensive resolution regime to enable timely and orderly resolution of a failing financial firm.

  2. The FRDI Bill also transfers the deposit insurance functions from the Deposit Insurance and Credit Guarantee Corporation to the Resolution Corporation.

  3. The FRDI Bill does not prohibit the Government from extending support to banks

Advantages of the New Bill

  • Resolution Corporation will provide integrated depositor protection and resolution service.

  • The FRDI Bill does not modify present protections to the depositors and only provides additional protections to the depositors in a more transparent manner.

What are Additional Protections to the Depositors in the FRDI Bill?

  • Deposits with banks are insured upto Rs. 1 lakh. Similar protection would continue under the FRDI Bill with Resolution Corporation is empowered to increase the deposit insurance amount.

  • The uninsured depositors, that is, beyond Rs. 1 lakh will have higher priority claim in the case of liquidation of a bank than unsecured creditors and Government dues.

Who are Uninsured Depositors?

  • Deposits with banks are insured upto Rs. 1 lakh. The uninsured depositors are the depositors who have deposits more than 1 lakh with a particular bank.

What are the tools suggested for resolution by FRDI?

FRDI Bill also introduces a menu of resolution tools: The different tools suggested by the FRDI are

  1. Bail in

  2. Acquisition

  3. Merger

  4. Bridge service provider

  • The tools to be used either singly or in combination with other tools.

  • Bail in provision may not be required in case of any specific resolution. Most certainly, it will not be used in case of a public sector bank as such a contingency is not likely to arise.

What is Bail In?

  • A bail-in is rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings. A bail-in is the opposite of a bailout, which involves the rescue of a financial institution by external parties, typically governments using taxpayer’s money.

What are the Proposals in the FRDI Bill in Case of Bail In?

  • Insured deposits of banks cannot be used in case of bail-in.

  • Cancellation of the liability of the depositor beyond insured amount will be possible only with the prior consent of the depositor.

  • Bail-in power can be used in a judicious and reasonable manner only by the Resolution Corporation and it will have to ensure that all creditors, including uninsured depositors, get at least such value, which they would have received in the event of liquidation of a bank

  • In case of injudicious and unreasonable exercise of bail-in power by the Resolution Corporation, for example If the depositors of a bank get less value than in liquidation, such affected depositors will have the right to get compensation from the Resolution Corporation on an order of the National Company Law Tribunal.

What are the Present Legal Arrangements for the Uninsured Depositors?

  • Presently uninsured depositors are treated on par with unsecured creditors and paid after preferential dues, including Government dues, in the event of its liquidation.

  • In case of the forced mergers of banks under the Banking Regulation Act, 1949, the right of depositors of a merging bank (transferor bank) can be reduced and has been reduced, without the consent of depositors. The new law fixes this.

How will Uninsured Depositors Benefit?

  • The rights of uninsured depositors will be better protected and such depositors will have an elevated status in the FRDI Bill compared to the existing legal arrangements

  • It is favourable for depositors if in case of bank failures, a bank is resolved rather than liquidated, because the depositors are expected to get a much higher value in resolution of the bank as a going concern than in liquidation.

What is Resolution Corporation?

  • Financial Resolution and Deposit Insurance Bill, 2017 introduces the resolution corporation to tackle bankruptcy in financial services firms.

  • Working of the resolution corporation is similar to Insolvency and Bankruptcy Code (IBC) for corporate entities.

  • Financial firms do not fall in the ambit of the IBC and, therefore, bankruptcy needs of financial firms, such as banks, have to be coordinated outside the IBC process.

Functions of Resolution Corporation

  1. It provides for detecting incipient insolvencies in financial firms by introducing a five-stage health classification of financial firms.

  2. When a financial firm is classified in the category of material risk to viability, much before it is it is classified in the category of critical risk to viability when there might be no option but to resolve or liquidate the financial firm.

  3. It suggests appropriate steps to nurse a financial firm at the stage when its health becomes weak

  4. Provides an option to design an appropriate bail-in instrument, which will be subject to Government scrutiny and oversight of the Parliament.

What are Resolution Tools?

The resolution tools include

  1. transfer of whole or parts of the assets and liabilities of a financial firm to another person, acquisition

  2. merger or amalgamation

  3. bridge service provider

  4. bail-in

  5. mandates recovery and resolution planning obligations to enable careful monitoring of risk to viability of a financial firm.

Government Support to Public Sector Banks Under FRDI?

  • The FRDI Bill does not propose in any way to limit the scope of powers for the Government to extend financing and resolution support to banks, including public sector banks.

  • Government’s implicit guarantee for solvency of public sector banks remains unaffected as the Government remains committed to adequately capitalise the public sector banks and improve their financial health.

What is the status of the FRDI bill?

  • The FRDI Bill was introduced in the Lok Sabha on August 10, 2017.

  • It is presently under the consideration of the Joint Committee of the Parliament, which is consulting all the stakeholders on the provisions of the FRDI Bill.

  • The Joint Committee of Parliament has been asked to submit their report to the Parliament by the last day of the Budget Session, 2018.

  • The Government is awaiting the recommendations of the Joint Committee of Parliament in regard to the FRDI Bill and would favourably consider the recommendations.

- Published/Last Modified on: February 7, 2018

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