{"id":13194,"date":"2017-12-11T13:24:53","date_gmt":"2017-12-11T07:54:53","guid":{"rendered":"http:\/\/blog.forumias.com\/?p=13194"},"modified":"2017-12-11T13:24:53","modified_gmt":"2017-12-11T07:54:53","slug":"frdis-bail-in-clause-creates-apprehension","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/frdis-bail-in-clause-creates-apprehension\/","title":{"rendered":"FRDI\u2019s \u201cbail-in\u201d clause creates apprehension"},"content":{"rendered":"<p><span style=\"color: #ff0000;\"><strong><u>Context:<\/u><\/strong><\/span><\/p>\n<ul>\n<li>The Financial Resolution and Deposit Insurance Bill, 2017, has been red-flagged because of its<strong>\u201cbail-in\u201d\u00a0clause (clause 52 of the draft legislatio<\/strong>n).<\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><strong><u>What is the FRDI Bill about?<\/u><\/strong><\/span><\/p>\n<ul>\n<li>The FRDI Bill is <strong>part of a larger, more comprehensive approach<\/strong> by the Centre towards systematic resolution of all financial firms.<\/li>\n<li>The Bill comes together with the <strong>Insolvency and Bankruptcy Code<\/strong>.<\/li>\n<li>It aims at <strong>finding and finalising a resolution plan<\/strong> to get a troubled company back on track, or, in the event of failure, ensure a quick winding up.<\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><strong><u>What is the need of the Bill? <\/u><\/strong><\/span><\/p>\n<ul>\n<li>The need for a specific regulation rose <strong>following the 2008 financial crisis<\/strong>.<\/li>\n<li>The crisis witnessed <strong>a large number of high-profile bankruptcies<\/strong>.<\/li>\n<li>With the Centre also actively encouraging people to engage more with the banking sector \u2014 both through schemes like Jan Dhan Yojana and moves like demonetisation, it becomes important to <strong>protect savers and those joining the formal economy in case a bank or insurance firm starts failing.<\/strong><\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><strong><u>What are the main provisions of the Bill? <\/u><\/strong><\/span><\/p>\n<ul>\n<li>The Bill provides for the setting up of a <strong>Resolution Corporation<\/strong>.<\/li>\n<li>It seeks to <strong>replace the existing Deposit Insurance and Credit Guarantee Corporation. <\/strong><\/li>\n<li>The corporation will be tasked with <strong>monitoring financial firms, anticipating their risk of failure, taking corrective action and resolving them in case of failure.<\/strong><\/li>\n<li>The corporation is also tasked with <strong>providing deposit insurance up to a certain limit yet to be specified, in the event of a bank failure.<\/strong><\/li>\n<li>It will be tasked with <strong>classifying financial firms on their risk of failure<\/strong> \u2014 low, moderate, material, imminent, or critical.<\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><strong><u>What are the drawbacks of the Bill?<\/u><\/strong><\/span><\/p>\n<ul>\n<li>Public sector bank unions argued that <strong>several provisions in the bill are against the interests of depositors<\/strong>.<\/li>\n<li>It will <strong>create an environment of mistrust<\/strong> between the banks and depositors.<\/li>\n<li><strong>The failure of the bill to quantify the deposits that will come under the insurance scheme has also led to worries <\/strong>among depositors if their interests will actually be protected.<\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><strong><u>What is the \u201cbail-in\u201d provision in the proposed law that is causing all anxiety?<\/u><\/strong><\/span><\/p>\n<ul>\n<li>Among other tools, the FRDI Bill also <strong>empowers the<\/strong> <strong>Resolution<\/strong><strong> Corporation to bail-in the company.<\/strong><\/li>\n<li>A <strong>bail-out is the use of public funds<\/strong> to inject capital into an ailing company.<\/li>\n<li>A <strong>bail-in involves the use of depositors\u2019<\/strong> funds to achieve those ends.<\/li>\n<li>This can be done either by <strong>cancelling the bank\u2019s liabilities, or converting them into other forms, such as equity.<\/strong><\/li>\n<li>This has caused a lot of concern <strong>among depositors<\/strong> who are worried they may <strong>lose their hard-earned money deposited with banks.<\/strong><\/li>\n<li>There are concerns that the FRDI Bill <strong>may not clearly lay down the quantum of protection for deposits, or classify deposits separately.<\/strong><\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><strong><u>What are the grounds behind this bail-in provision?<\/u><\/strong><\/span><\/p>\n<ul>\n<li>The principal aim is to <strong>minimise the cost of any such failures of financial firms to taxpayers<\/strong>.<\/li>\n<li>The other objective is that <strong>shareholders of banks and creditors must also pay their share of costs, rather than governments or taxpayers absorbing all losses.<\/strong><\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><strong><u>What has been the government\u2019s response?<\/u><\/strong><\/span><\/p>\n<ul>\n<li>The government has said that <strong>India\u2019s FRDI Bill is more depositor-friendly than that of many other jurisdictions that provide for statutory bail-ins<\/strong>.<\/li>\n<li>It has also said that it <strong>does not propose in any way to limit the scope of powers to extend financing and resolution support to banks, including public sector banks.<\/strong><\/li>\n<\/ul>\n<p><span style=\"color: #ff0000;\"><strong><u>Apart from the \u201cbail-in\u201d provision, what are the other implications of the proposed law? <\/u><\/strong><\/span><\/p>\n<ul>\n<li>Once the proposed law sets in, <strong>banks, insurers, pension funds, asset management companies, all will have to put in place resolution plans<\/strong> or \u201cliving wills\u201d.<\/li>\n<li>It will <strong>address a potential failure of the firm in the least costly manner.<\/strong><\/li>\n<li>This plan will be <strong>continuously reviewed by the proposed Resolution Corporation<\/strong>, like the Federal Deposit Insurance Corporation (FDIC) in the US.<\/li>\n<li>In cases of bank failures, the <strong>announcement of a shutdown is typically made on a Friday evening, and by Monday, cheques reach customers<\/strong>, or money is credited to their accounts in two working days.<\/li>\n<li>A <strong>closure or shutdown will be the final option<\/strong> \u2014 the first option would be to <strong>transfer the assets and liabilities to another firm<\/strong>, or to create a <strong>\u201cbridge service provider\u201d<\/strong> to which they would be transferred until eventual sale, revival, merger, or acquisition.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Context: The Financial Resolution and Deposit Insurance Bill, 2017, has been red-flagged because of its\u201cbail-in\u201d\u00a0clause (clause 52 of the draft legislation). What is the FRDI Bill about? 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&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/frdis-bail-in-clause-creates-apprehension\/\">Continue reading <span class=\"screen-reader-text\">FRDI\u2019s \u201cbail-in\u201d clause creates apprehension<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":13195,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[27],"tags":[],"class_list":["post-13194","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured-editorials","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2017\/12\/26474-rupee-reuters.jpg?fit=1003%2C526&ssl=1","views":{"total":0,"cached_at":"","cached_date":1704826309},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/13194","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=13194"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/13194\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/13195"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=13194"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=13194"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=13194"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}