1.
FRDI BILL: THE FINANCIAL RESOLUTION AND
DEPOSIT INSURANCE
THE RISK TO YOUR DEPOSIT WILL BE NO MORE THAN WHAT IT IS TODAY

2.
Overview
The Financial Resolution and Deposit Insurance (FRDI) Bill is likely to be debated in the
winter session of Parliament which begins on December 15, 2017. Currently, the bill is
pending before a Standing Committee of Parliament.
Read Full Article Here: http://economyria.com/frdi-bill-the-bail-in-clause/

3.
Background of the FRDI Bill
India recently enacted the Insolvency and Bankruptcy code 2016. It was done
to consolidate all the existing laws related to insolvency in India and to simplify the process of
insolvency resolution. The law addresses the issue of insolvency in companies and
partnership firms
(Read: The ultimate guide to understanding Insolvency and Bankruptcy code 2016.)
There is a need for a similar legal framework in the financial sector as well. There is no
law at present in India to tackle insolvency in banks in an orderly and systematic way.
FRDI Bill seeks to provide a comprehensive resolution framework to deal with
insolvency issues in the financial sector.

4.
Financial sector entities include banks, Non-bank financial corporations (NBFCs),
pension fund, mutual fund, insurance companies, stock exchanges, clearance
houses etc.
The financial sector needs a specialized law because the modern financial
system is interconnected to each other. A failure in one bank could have a
contagion effect on other banks and the entire economic system could collapse
like a house of cards.
Hence, the FRDI bill was introduced to enable orderly resolution of banks in
of failure and prevent a disruption to the economy.
(Read: The Financial Crisis 2008 Explained)

5.
Existing Framework
There is no specific law dealing with the insolvency of banks in India.
The RBI and the other regulators have used tools like mergers and amalgamations
in the past. But, these were ad-hoc solutions. There is no single law and agency
to resolve the insolvency in a systematic way.
But, the Deposit insurance & credit guarantee corporation (DICGC) Act, 1961
guarantees that deposits up to Rs.100000 would be insured, if a bank
becomes insolvent/ bankrupt. The amount is insured by Deposit Insurance &
credit guarantee corporation (DICGC). DIGCC is a subsidiary of RBI
There is no clarity on what will happen to the deposits above Rs.100000.

6.
We have never faced any issues as the Government/ RBI has never allowed any
scheduled commercial bank to fail. The Finance Minister, Arun Jaitley, has
reiterated that this implicit guarantee for public sector banks will remain
unaffected with the introduction of the FRDI Bill.
Co-operative banks have failed. The depositors of cooperative banks, which
have been in losses, have not been able to get their money back after years
because their deposits have been frozen. Once the FRDI is in place, the wait will
be much shorter as there will be a time-bound resolution.

7.
FRDI Bill
The bill provides for the setting up of an independent new regulator, the
Resolution Corporation (RC).
The RC will have representatives from all financial sector regulators namely
the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI),
the Insurance Regulatory and Development Authority of India (IRDA) and the
Pension Fund Regulatory and Development Authority (PFRDA). It will also have
members from the ministry of finance as well as 2 independent members, 3 full-
time members and a chairman.
The existing DICGC Act will be repealed and DICGC will be closed.
The Resolution Corporation or RC will insure deposits. The insured amount will
be determined in consultation with the RBI and is unlikely to be below the
existing Rs.100000.

8.
[It is also to be noted that the Rs. 1 lakh insurance limit covers 93 % of the
depositors (in number) in the country. In other words, only 7 % keep deposits
above Rs. 1 lakh in a particular bank. So, the masses have been covered.]
The important task of the RC is to closely monitor financial firms and classify
financial firms on the basis of their risk of failure — low, moderate, material,
imminent, or critical. The factors to be considered while classifying are capital
adequacy ratio, liquidity, asset, liabilities, leverage ratio etc.
The monitoring will help the banks to anticipate failure and take necessary
corrective actions in advance.

9.
If the bank is classified as critical, the RC will step-in to resolve and take over the
management of the bank.
The RC has various tools at its disposal for resolution: mergers, acquisitions,
portfolio transfers, bail-in, setting up of bridge service providers etc.
The last resort is liquidation. In case of liquidation, the RC will oversee its orderly
demise.
[Bridge-service provider is a temporary institution established to take over the
operations of a financial institution, for a maximum period of 1 year.]

10.
Bail-in Clause
As mentioned, the bill includes a ‘bail-in’ clause. It is one of the tools at the RC’s
disposal to resolve a failed bank. It means that the cost of bank failure should
be borne by the stakeholders of the bank.
We know what is ‘bail-out’. In ‘bail-out’, the Government uses the taxpayers’ funds
to support the bank. In the aftermath of the financial crisis of 2008, many banks
had to be bailed out in countries like the US, Europe etc.
In ‘bail-in’, stakeholders funds (shareholders, depositors etc.) is used to
provide support to the bank.

11.
It implies that the deposits over the insured amount (Rs.100000) will be used
support the bank. These deposits can be converted into equity shares.
As per the proposed bill, the bail-in can be invoked only if you have given
your consent to the bank when you signed the deposit forms.
In November 2011, the G2o leaders had endorsed some of the key attributes of
such type of resolution.

12.
Conclusion
The Bill has generated unnecessary controversies
The finance ministry has clarified in a statement “The provisions contained in the
FRDI Bill, as introduced in the Parliament, do not modify present protections to
the depositors adversely at all. They provide additional protections to the
depositors in a more transparent manner. The FRDI Bill will strengthen the
system by adding a comprehensive resolution regime that will help ensure
that, in the rare event of failure of a financial service provider, there is a system
of quick, orderly and efficient resolution in favor of depositors.”
To sum up, if we look beyond the political rhetoric, it is clear that the risk to the
depositors will be no more than what it is today

13.
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