Over the last couple of weeks, there has been much furore over the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, which has been under the active consideration of the Parliament for a while. Despite the Prime Minister Narendra Modi’s strong backing to the proposed legislation, the criticism against the provisions of the bill, especially on the bail-in provision has not died down. It is against this backdrop, it is pertinent to know the key features of the bill and understand the debate over its provisions.
FRDI Bill, 2017 – Key Features
As the title of the bill suggests, the FRDI Bill 2017 seeks to provide for a comprehensive legal resolution framework for banks, insurance companies and other financial sector entities to deal with bankruptcy situation. Once enacted, it will pave the way for the creation of the Resolution Corporation under the Reserve Bank of India (RBI) by repealing the existing Deposit Insurance and Credit Guarantee Corporation. The Corporation was created by the Parliament in 1961 as a subsidiary of the Reserve Bank of India (RBI).
As per the FRDI Bill 2017, the Resolution Corporation’s primary mandate is to protect the stability and resilience of the financial system and decrease the time and costs involved in resolving distressed financial entities. The Corporation also seeks to protect the interests of the depositors to the extent possible.
The bill empowers the proposed Resolution Corporation to assess the financial entities from time to time and classify the crisis hit firms depending on the degree of vulnerability. The categories of bankrupt entities will be that having - Material risk to viability, Imminent risk to the viability and Critical risk to viability. The Corporation has been given powers to issue directives to the ailing entities on the steps to be taken to contain the downward trend. Once, an entity declared as having ‘Critical Risk to Viability’, the Corporation will overtake the management of the firm and complete the resolution process within two years.
The FRBI Bill complements the existing Insolvency and Bankruptcy Code, 2016 by providing a resolution framework for the financial sector. Once implemented, this Bill together with the Code will provide a comprehensive resolution framework for the economy.
Understanding the Debate over Bail-in & others
The Bill came under attack as it seeks to alter over the decades-long relationship between the financial entities (Banks, Insurance Companies, etc.) and its customers (Depositors). As per the Section 52 of the Bill, which proposes the ‘bail-in’ provision, the money of depositors will be under the disposal of the Resolution Corporation for the recapitalization of ailing banks. This provision has caused panic among the depository community, who are mostly lower and middle income groups.
The bail-in provision has come under attack by not only the public at large, but also of the public policy experts. The experts contend that the bail-in clause in the Bill is a blind copy of the guidelines of the Switzerland-based Financial Stability Board (FSB). As per the critics of the FRDI Bill, the norms of the FSB were drafted in the backdrop of the shortcomings of the bailout strategy adopted by the US Government to tide over the subprime crisis in 2008-09. While the bailout strategy ensures the onus of responsibility lies with the Government, whereas in bail-in, the banks are rescued by using the funds of the depositors.
Critics point out that, unlike the west, where the majority of the depositors in Banks are high income groups and private entities, banks in India mobilize large sums from ordinary citizens. Hence, it has been argued that the bail-in provision in the FRDI Bill is nothing but shirking of the responsibility by the Government from protecting ordinary depositors.
Another criticism against the Bill is the continuation of the Rs 1 lakh ceiling on the insurance amount. As per the critics, the Bill failed to take into consideration the decreasing value of money due to inflation and continued with the insurance limit that was fixed in 1993.
Banks are at the heart of the economy. Since their nationalization in 1969 and 1980, they played a key role in the mobilization of resources from the middle class. Despite the increase in the investment avenues due to the emergence of market-oriented economy, ordinary citizens have continued to remain dependent on banks for savings in the belief that they are foolproof and in case of any eventuality the Government will rescue the Banks. The growing vulnerability of banks due to the massive Non Performing Assets (NPAs) has intensified the depositor’s ire against the FRDI Bill.
In order to ease the current restlessness and bridge the trust deficit among the depositors, the Government must communicate to the public about the rationale of the bill, especially the bail-in class, in a clear and simple manner. Besides, the government must look into increasing the existing Rs 1 lakh insurance cover, which was fixed over 24 years ago.