About Financial Resolution and Deposit Insurance Bill:
- Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 seeks to protect and enhance the depositors’ existing rights.
- It also brings in a comprehensive and efficient resolution regime for financial firms.
- The FRDI Bill was introduced in the Lok Sabha on August 10, 2017.
- The bill is similar to the Insolvency and Bankruptcy Code, 2016.
- It also aims to inculcate discipline among financial service providers in the event of financial crises, by limiting the use of public money to bail out distressed entities.
- Once enacted, a resolution corporation will be setup to strengthen the stability and resilience of the entities in the financial sector.
What was the need?
- There is no comprehensive and integrated legal framework for resolution, including liquidation, of financial firms in India presently.
- The powers and responsibilities for resolution of financial services providers are given under multiple laws to regulators, Government and the Courts, which does not facilitate development of specialised resolution capabilities.
- Also, because of this dispersed role definition, resolution of financial conglomerates becomes difficult.
- The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill) will replace the existing resolution regime by providing 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 favour of depositors.
Salient features of the bill:
- The Bill establishes a Resolution Corporation to monitor financial firms, anticipate risk of failure, take corrective action, and resolve them in case of such failure.
- The Corporation will also provide deposit insurance up to a certain limit, in case of bank failure.
- The Resolution Corporation or the appropriate financial sector regulator may classify financial firms under five categories, based on their risk of failure.
- These categories in the order of increasing risk are:
- (i) low, (ii) moderate, (iii) material, (iv) imminent, and (v) critical.
- The Resolution Corporation will take over the management of a financial firm once it is classified as ‘critical’.
- It will resolve the firm within one year (may be extended by another year).
- Resolution may be undertaken using methods including: (i) merger or acquisition, (ii) transferring the assets, liabilities and management to a temporary firm, or (iii) liquidation. If resolution is not completed within a maximum period of two years, the firm will be liquidated.
- The Bill also specifies the order of distributing liquidation proceeds.
Significance of the bill:
- The FRDI will provide a comprehensive resolution framework to deal with bankruptcy situations in financial sector entities such as banks and insurance companies.
- It provides for establishment of a resolution corporation with powers relating to transfer of assets to a healthy financial firm, merger or amalgamation, liquidation to be initiated by an order of the National Company Law Tribunal.
- The bill is about issues that can arise when companies go bankrupt or insolvent, except that this Bill deals only with the companies that are in the financial sector.
- The FRDI Bill seeks to decrease the time and costs involved in resolving distressed financial entities.
- The FRDI Bill does not prohibit the Government from extending support to banks.
- It seeks to protect customers of financial service providers in times of financial distress.
- The Bill would help in maintaining financial stability in the economy by ensuring adequate preventive measures, while at the same time providing the necessary instruments for dealing with crisis events.
- It aims to strengthen and streamline the current framework of deposit insurance for the benefit of retail depositors.
What are the concerns?
- The bill gives power to a government entity to use depositors money to save a bank on the verge of bankruptcy.
- The government entity can declare the bank doesn’t owe you any money though you have deposited your hard-earned money with it.
- The Bill says that in case of a bank failure, the proposed corporation will provide deposit insurance up to a certain limit, which has not been specified.
- Currently, bank deposits of up to Rs 1 lakh are insured.
- The Resolution Corporation will have the power to enter into contracts, power to sue or get sued, and power to acquire/hold/dispose properties.
- The members will include representatives from various financial regulators as well as the Ministry of Finance.
- Some key functions and powers of the corporation are:
- Provide deposit insurance to banking institutions;
- Specify the criteria for classification of a specified service provider into one of the categories of risk to viability;
- Act as an administrator for service providers that have been classified in the category of critical risk to viability;
- Exercise powers in relation to certain termination rights in respect of specified service providers;
- Resolve a specified service provider which has been classified in the category of critical risk to viability;
- Act as a liquidator for a specified service provider against which an order of liquidation has been made;
- Any other powers and functions as may be prescribed.