What is the issue?
The Financial Resolution and Deposit Insurance (FRDI) Bill has raised many concerns with Bank unions and depositors.
What is the FRDI Bill?
- It aims to limit the fallout of the failure of institutions like banks, insurance companies, non-banking financial companies, pension funds and stock exchanges.
- The FRDI Bill is aimed at insuring the money of a bank’s depositors in the case of an eventuality where the bank would have to be liquidated.
- The FRDI Bill is currently pending before a Standing Committee of Parliament.
- The committee will submit its report in the upcoming winter session of Parliament.
What are the concerns?
- It has been criticised that people’s money was being used to bail out banks that made bad lending decisions.
- It is also apprehended to be compromising on the interests of the depositors.
- Power - The bill proposes the setting up of a Resolution Corporation.
- The direction and management of the corporation vests with the Board, subject to the terms and conditions of the Act.
- Six of the 11 members of the Board will be nominated by the government, giving it the final say in decision-making.
- The greater representation in the Resolution Corporation gives the government overweening powers.
- Notably, debt restructuring and ensuring the robustness of financial institutions was previously the domain of the RBI.
- Bail-in clause - This clause gives banks the authority to issue securities in lieu of the money deposited.
- The insurance option covers only Rs.1,00,000 of the principal.
- The remainder of the sum deposited with a bank will be converted to tradable financial assets which can be redeemed.
- The contention is that their value will not be immediately commensurate with the deposit amount.
- As the bank has filed for bankruptcy, the value of assets held would have also eroded.
- Notably, other countries that have experimented with a bail-in clause have not fared well.
- E.g. In Cyprus, depositors lost almost 50% of their savings when a “bail-in” was implemented by the resolution corporation.
What does the government say?
- The government has so far responded defending the provisions of the Bill.
- The FRDI Bill is said to be strengthening the system by adding a comprehensive resolution regime.
- It argues that the clauses in the legislation provide additional protections to the depositors in a more transparent manner.
- And that in the event of failure of a financial service provider, there is a system of quick, orderly and efficient resolution in favour of depositors.
- Government defends the FRDI Bill as being far more depositor-friendly than many other jurisdictions that provide for statutory bail-in.
- In a statutory bail-in, the consent of creditors/depositors is not required for bail-in.
Source: The Hindu, Livemint
