The Financial Resolution and Deposit Insurance Bill, 2017, or FRDI Bill, is expected to be tabled in the upcoming Winter Session of Parliament. Together with the Bankruptcy and Insolvency Code, re-capitalisation of PSU banks, and FDI in insurance, this Bill is touted to be a landmark reform in the the financial sector. But, it is facing strong opposition from the bank employees union. In August, banking employees went on a strike against the proposed legislation. The Bill has also raised concerns among depositors.
The FRDI Bill seeks to create a framework for resolving bankruptcy in banks, insurance companies and other financial establishments. The Bill was first introduced in the Monsoon Session but was referred to a joint parliamentary committee for review. The committee will submit the report during the Winter Session, after which an amended Bill is expected to be tabled.
Resolution Corporation
The Bill proposes to establish a ‘Resolution Corporation’ to monitor financial firms, calculate stress and take "corrective actions" in case of a failure. This Corporation will classify financial firms based on their risk factors as low, moderate, material, imminent, and critical. In case of critical firms, the Corporation will be empowered to take over and resolve issues within a year.
The Bill empowers the Corporation to take corrective actions such as merger or acquisition, transferring the assets, liabilities to another firm, or liquidation.
Existing method
While India never had such a resolution authority before, the Reserve Bank and the IRDAI were handling these functions for the banking and insurance sectors. The RBI, in the past, had asked PSU banks to take over stressed banks in order to protect the depositors and employees.
The Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, established in 1971 insures all kinds of bank deposits upto a limit of ₹1,00,000. In case a stressed bank had to be liquidated, the depositors would be paid through DICGC.
However, the proposed Bill seeks closure of the DICGC, as the credit guarantee will be taken care of by the Resolution Corporation itself.
Key issues
The Resolution Corporation will be under Finance Ministry with representatives from SEBI, RBI, IRDAI, and PFRDA. The Chairperson, two independent members and other members of the the Board would effectively be appointed by the Union Government.
The Bill provides one year time for the Corporation to resolve issues in a 'critical' firm. It has provisions to extend this time frame to another year. As a part of resolution the Corporation may scale-down the number of employees in the stressed firm, transfer them or issue pay-cuts. Beyond two years, the firm would be liquidated.
"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.
Until now it was mandatory for banks to pay a sum to the DICGC as insurance premium. Though the Bill proposes the banks to pay a sum to the Resolution Corporation, it neither specifies the insured amount nor the amount a depositor would be paid. It is thus unclear how much a depositor would be paid in case of liquidation.
The bail-in clause
The Bill proposes 'bail-in' as one of the methods to resolution, where the banks issue securities in lieu of the money deposited. In the past, the bail-in efforts had largely worked against depositors. In Cyprus, depositors lost almost 50 per cent of their savings when a bail-in was implemented, Thomas D. Franco, general secretary of the bank employees association AIBOC had told Frontline .
The banking sector is reeling under stress due to bad loans. According the RBI's Financial Stability Report released in June 2017, the gross non-performing advances (GNPAs) ratio of all banks stood at 9.6% as of March 2017. The RBI had recommended that banks initiate insolvency proceedings for 12 large defaulters, constituting 25% of the system’s NPAs.
While the provisions of the Bill ensures the stability of financial sector and resolution of issues in time-bound manner, the ambiguities on how the depositors would be repaid needs to be addressed.
