The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 introduced in the Lok Sabha on August 10, 2017, is presently under the consideration of the Joint Committee of the Parliament. In this article, you will understand what is FRDI Bill and how will it affect your bank deposits.
What is Financial Resolution and Deposit Insurance (FRDI) Bill, 2017?
FRDI Bill provides a framework to deal with Insolvency and Bankruptcy situation in financial sector entities such as; Banks, insurance companies and other financial intermediaries.
FRDI Bill envisages setting up a ‘Resolution Corporation’ which will have the rights regarding the transfer of assets, merger or integration of properties and tackle bankruptcy of financial institutions at the early stage.
Why government is setting up Resolution Corporation (RC)?
FRDRI bill aims to set up a RC so that the sick condition of financial firms can be caught early rather than allowing it to get sicker and then suddenly bankrupt. RC will categorise sick financial firms as per their risk profile and prevent them from being bankrupt by appropriate measures.
The RC will classify financial firms into five categories based on their risk of failure:
5. Critical risk to viability.
The financial risk will be evaluated on the basis of;
1. Capital adequacy
2. Assets and liability
3. Asset quality
4. Capability of management
5. Earnings sufficiency
6. Leverage ratio
7. Liquidity of the firm and so on
Now let us understand the impacts of FRDI bill on your bank deposits?
1. As per the present rule (The Deposit Insurance and Credit Guarantee Corporation Act, 1961); customers can withdraw their bank money as per his/her requirements but FRDI bill will snatch away this right. Most surprising; you won’t even be able to challenge it in court.
2. Banks can also convert your account balance to a fixed deposit; repayable after five years.
3. 'Bail-in' provisions under the FRDI bill means that; if you have Rs. 10 lakhs in your account and if the bank has trouble, it can reduce your Rs. 10 lakhs to Rs. 1 lakh.
4. During the financial crisis; banks will decide that; how much (50% or 100%), in which form (cash or share) and when your money will be returned?
5. If the banks give its shares to customers in lieu of his/her deposited money. The value of the bank shares will be subject to market risk while the deposited money was not subject to market risk.
6. According to the current rule, the bank gives ‘uniform insurance cover’ to all account holders on the deposit of more than one lakh rupees.
But after the introduction of new bill this insurance cover will be different for each account holder. For rich account holders, the amount of insurance can be higher and for poor account holders’ insurance cover will be lesser.
In such conditions it is expected that people would hesitate in depositing money in the banks which would adversely affect the development of the banking industry and overall growth of the country.
In the concluding remark; it can be said the FRDI Bill will strengthen the system by adding a comprehensive resolution regime that will ensure that, in the rare event of failure of a financial service provider, there is a system of quick, orderly and efficient resolution in favour of depositors.