All about the Act

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This Blog is written by Iesha Sharma from University of Petroleum and Energy Studies, Dehradun. Edited by Ujjawal Vaibhav Agrahari.

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INTRODUCTION

If you saved hard earn money in your banks and it is used by the bank without your permission and there is no bond of how much money will be returned to you and when. Did that scare you enough?

A bill was introduced on August 10 2017 in Lok Sabha during monsoon season 2017 in joined committee of both the houses of the parliament. It named Financial Resolution and Deposit Insurance (FRDI) Bill, 2017[1]. The framework of the bill is to deal with the insolvency and bankrupts’ situation in the financial sector for entities such as banks, insurance, companies, and other financial sector intermediaries. To deal with emerging company bankruptcies during the year 2008- 2016, the union cabinet planned to bring this bill.

However, the bill has been attracted to many controversies and fuzz off a leading scare among the masses. Customers feared that their deposited money would be used by the banks and ATM also knock down the shutters due to the inaccessibility of cash. There were treated with These provisions may put the depositors in adverse positions if the bank fails in the money.

WHY THIS BILL?

During the year 2008, there were several controversial bankruptcies noted in India, so this bill was introduced to save the economy of India. If the bank becomes bankrupt, then NPA of the bank increase this affects all the citizen of India.  Till now RBI had the power to decide the law to handle the bank’s debts but this bill proposes constitution of a new corporation named Resolution Corporation which would keep a check on the distress in financial firms in a financial institution including non- banking financial companies, insurance companies, stock selling, etc and government also felt it is crucial to protect the interest and savings of those who have joined the formal economy in case a bank or insurance firms start failing.

WHAT ARE THE PROVISIONS OF FRDI BILL?

The FRDI bill instructed to make a resolution corporation which will be given the power to decide whether to bail- in a bank in case of its bankruptcies and the amount to be returned back to such bank’s depositors or not. A bail-in different from the Bail–out clause. A Bailout means to use the funds of the public and to use that capital for ailing the company whereas Bail-in means to use the funds of the depositors to achieve the ends. Examples of a Bail-in include writing of a bank’s liabilities or converting them together into different forms, such as equity.

Till now, if any bank loses its money, then the minimum amount be given is 1 lakh. Which is the minimum amount decided by the 1962 law insured by the Deposited Insurance and Credit Guarantee Corporation (DICGC). The bill has a similar provision which permits the resolution corporation to set the insured amount in consultation with the RBI [2]. If the bill is passed, then the depositor’s money or the bank’s customers will be used to save the bank from bankruptcies or any failure. Then the government shall decide the amount to be returned to the people with no minimum amount been set being set specified in the event of bank failure. So, this is the government-controlled board. The clause 52 of the bill also says that the resolution corporation may ‘cancel’, modify or change the force of liability of the institution, or cancel the liability altogether.

The resolution corporation has classified bank, insurance sector, stock exchange in terms of risk of failure – low, moderate, material category, imminent or critical will also be the task of this body and once it is critical then he management of the body will be taken over.

DOES THE BILL SPECIFY SAFEGUARDS FOR CREDITORS, INCLUDING THE DEPOSITORS?

The Bail-in states that the process of the resolution corporation while using the Bail-in to resolve a firm will be limited. There are certain safeguards for the creditors which seek to protect them and to ensure the continuity of the critical functioning of the firms. The order of the liquidation will always be kept in the mind.

When the firm is being resolved using the Bail-in, the corporation will be ensured that both of the creditors including the bank and the depositors do not receive less than what they would have received if the firm would have to be liquidated [3][4]. Further, the bill allows liability to be canceled if converted only under the bail-in if the creditor has given its consent to do so.

DO OTHER COUNTRIES CONTAIN SIMILAR PROVISIONS?

After the global financial crises in several countries in 2008, apparently to replace Bailouts funded by the government. The Bail-in is the latest example of the new approach is taken by the resolution. Contains such as the UK and those across Europe has introduced legislation that in effect give the government in those countries the option for freezing, and perhaps seizing bank deposited above a certain level. This latest approach was really been used in Cyprus during its economy declined and fell short after the Greek crises and it helped the bank to recover when the 40 to 60 of the depositor’s money was used who has $100,00 deposits.

The financial stability board and the international body comprises G20 countries (including India), recommended that countries should allow resolution for the Bail-in jurisdiction and the European Union also suggested that the countries should include the Bail-in clauses in there resolution tool⁵.

ANALYSIS

Admitting all the confusion, the government has repeatedly classified that the bill seeks to protect and enhance the rights of the depositors. But this will take away the personal protection which is granted to the people. The Bail-in the only one of the several resolution corporations tools for the FRDI bill. The government will certainly not use the clause in the case of the public sector firms.

The bill however doesn’t prevent the government from financing and offering resolution support to the banks, including public sector banks.

CONCLUSION

The government today has withdrawn the FRDI bill from the Lok Sabha. The move took place due to the widespread of the rumors related to the bail-in process and fear amongst the general public. The depositor’s clause was in question that hard earn money of the depositors was at risk as well as their insurance cover[6]. There has been a recent change of increase in deposit insurance from 1 lakh to 5 lakhs in the insolvency law. However, the government has said to reintroduce the bill in the future keeping in the mind the best interest of the people and addressing the concerns over deposits[7].

REFERENCE

(1) https://www.congress.gov/bill/116th-congress/senate-bill/4325/all-info

(2) The depositor insurance and credit guarantee corporation act, 1961

(3) Report of the committee to draft the code on resolution of the financial firms, September 2016

(4) Section 52, the financial resolution and deposition bill,2017

(5) Recover and resolution, Bafin, Federal Financial Supervisory Authority of Germany.

(6) ‘Modi government’s FRDI bill may take away all hard-earn money; India today, december5,2017

(7) financialexpress.com