Financial Resolution and Deposit Insurance Bill, 2017 (Updated)

Financial Resolution and Deposit Insurance Bill, 2017:

• The FRDI Bill is part of a larger, more comprehensive approach by the Centre towards systematic resolution of all financial firms.
• The Bill comes together with the Insolvency and Bankruptcy Code.
• It aims at finding and finalising a resolution plan to get a troubled company back on track, or, in the event of failure, ensure a quick winding up.

Need of the Bill:

• The need for a specific regulation rose following the 2008 financial crisis.
• The crisis witnessed a large number of high-profile bankruptcies.
• With the Centre also actively encouraging people to engage more with the banking sector — both through schemes like Jan Dhan Yojana and moves like demonetisation, it becomes important to protect savers and those joining the formal economy in case a bank or insurance firm starts failing.

Main provisions of the Bill:

• The Bill provides for the setting up of a Resolution Corporation.
• It seeks to replace the existing Deposit Insurance and Credit Guarantee Corporation.
• The corporation will be tasked with monitoring financial firms, anticipating their risk of failure, taking corrective action and resolving them in case of failure.
• The corporation is also tasked with providing deposit insurance up to a certain limit yet to be specified, in the event of a bank failure.
• It will be tasked with classifying financial firms on their risk of failure — low, moderate, material, imminent, or critical.

Resolution Corporation:

• 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 Deposit Insurance and Credit Guarantee Corporation Act insures an amount of deposit (currently 1 lakh); it can be increased by the Corporation to whatever it chooses.
• It 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).
• If resolution is not completed within a maximum period of two years, the firm will be liquidated.

Financial resolution by Resolution Corporation:

• Resolution may be undertaken using methods including:

Merger or acquisition:

• In a merger, the boards of directors for two companies approve the combination and seek shareholders approval. After the merger, the acquired company ceases to exist and becomes part of the acquiring company.
• In a simple acquisition, the acquiring company obtains the majority stake in the acquired firm, which does not change its name or legal structure.

Transferring the assets, liabilities and management to a temporary firm:

• The assets, liabilities and management of the ‘critical’ financial firm will be handed over to another firm.

Liquidation:

• Liquidationis the process by which a company (or part of a company) is brought to an end, and the assets and property of the company are redistributed.

Bail in:

• According to the bail in tool bank’s liabilities can be cancelled or modified to shore up its finances.

Current status of the Bill:

December – 2017:

• The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill), is presently under the consideration of the Joint Committee of the Parliament.
• The Joint Committee is consulting all the stakeholders on the provisions of the FRDI Bill.
• Certain confusions have been expressed in the media regarding “bail-in” provisions of the FRDI Bill.

January – 2018:

• The government issued a clarification on the Financial Resolution and Deposit Insurance Bill’s “bail-in” provision.
• According to the government the “bail-in” clause will not be used for public sector banks (PSBs).
• The “bail-in” clause can only be used in private banks, and that too only if the customers allow it.
• Furthermore, the use of the “bail-in” clause by the Resolution Corporation will be subject to government scrutiny and parliamentary oversight.
• In the event of a “bail-in”, the Resolution Corporation will have to ensure that depositors get back at least as much money as they would have if the bank had been liquidated.
• The claims of uninsured depositors (that is, beyond 1 lakh) would be given precedence over the claims of unsecured creditors and government dues.