FRDI Bill

 

 

  1. FRDI Bill
    • Financial Resolution and Deposit Insurance Bill
    • Tabled in Parliament in Aug 2017 (pending before a Standing Committee of Parliament)
  2. Difference between “bail-out” and “bail-in”
    • 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.
  3. About the Bill and the “bail-in clause” controversy
    • 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.
    • It is meant to consolidate all the various laws covering India’s financial institutions.
    • It seeks to create a ‘Resolution Corporation’ (RC)— 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 RC is also tasked with providing deposit insurance up to a certain limit yet to be specified, in the event of a bank failure. Besides, the RC will classify 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.
    • The Bill is to work in tandem with the Insolvency and Bankruptcy Code (IBC).
      • To do this, one of the tools the RC will be empowered with is a “bail-in”.
  4.  Are deposits of customers at risk?
    • The government said that under the current Deposit Insurance and Credit Guarantee Corporation Act, deposits up to Rs. 1 lakh are insured. Under the FRDI Bill, the RC will be empowered to increase this limit to whatever it chooses. So, at least that much will be protected.
    • Further, the claims of uninsured depositors (that is, beyond Rs.1 lakh) would be given precedence over the claims of unsecured creditors and government dues.
  5. Latest update about the “bail-in” clause?
    • The government has (in Jan 2018) clarified that the ‘bail-in’ clause will not be used for public sector banks (PSBs). It also reiterated its implicit guarantee of PSB solvency.
    • Further, the cancellation of the liability of a depositor beyond the insured amount cannot take place without his or her prior consent. So, the bail-in clause can only be used in private banks, and that too only if the customers allow it.
    • The use of the bail-in clause by the RC will be subject to government scrutiny and parliamentary oversight. In the event of a bail-in, the RC will have to ensure that depositors get back at least as much money as they would have if the bank had been liquidated.

 

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