Bank depositors’ fears about the safety of their savings — once the Centre enacts the proposed new law for resolving financial entities’ bankruptcy — may be premature as the legislation is still at the drafting stage and could see several ‘corrections’ before its passage, Finance and Corporate Affairs Minister Arun Jaitley said on Friday.
Expected to be tabled in Parliament’s winter session that starts December 15, the Financial Resolution and Deposit Insurance (FRDI) Bill of 2017 proposes scrapping the Deposit Insurance and Credit Guarantee Corporation (DICGC) that guarantees repayment of all bank deposits up to ₹1,00,000 in case a stressed bank is liquidated.
Ambiguity over savings
There is ambiguity on how depositors’ savings will be protected in stressed banks and other financial entities under the new law, which also includes a ‘bail-in’ option to resolve financial entities’ stress. A bail-in option entails a bank issuing securities in lieu of the money deposited in its coffers. Asked about the implications of this clause, Mr. Jaitley said the drafting process of the Bill is still under way and it could be reviewed as part of the regular drafting process for new legislations.
“The Bill still has to go through the overall drafting process. The Parliamentary committee can offer drafting suggestions. Thereafter it will go back to the Cabinet,” Mr. Jaitley said.
Will seek feedback
“The Cabinet will place the recommendations in the public domain and ask for feedback. So I think a lot of corrections will take place,” the Minister said. Instead of the DICGC, the Bill envisages a Resolution Corporation under the Finance Ministry with representatives from the stock market, banking, insurance and pension fund regulators. Lenders, which have to pay a premium to the DICGC for insuring deposits of up to ₹1 lakh, would have to pay a sum to the Resolution Corporation as per the proposed Bill. But it is silent on the insured amount.
“The Corporation shall, in consultation with the appropriate regulator, specify the total amount payable by the Corporation with respect to any one depositor, as to his deposit insured under this Act, in the same capacity and in the same right,” the draft Bill states, creating doubts about the extent of deposits that will be guaranteed as also whether depositors may face varying degrees of haircuts or writedowns on their savings at different stressed entities.
The Corporation will be given a year’s time to resolve problems facing firms in trouble.
