Aims to deal with financial sector crisis and protect interest of customers.
What the Bill seeks to do?
- The FRDI Bill is part of a larger, more comprehensive approach by the Centre towards systematic resolution of all financial firms — banks, insurance companies and other financial intermediaries.
- The Bill comes together with the Insolvency and Bankruptcy Code to spell out the procedure for the winding up or revival of an ailing company.
Provisions:
- The Bill would provide for a comprehensive resolution framework for specified financial sector entities to deal with bankruptcy situation in banks, insurance companies and financial sector entities.
- The Bill when enacted, will pave the way for setting up of the Resolution Corporation. It would lead to repeal or amendment of resolution-related provisions in sectoral Acts as listed in Schedules of the Bill.
- It will also result in the repealing of the Deposit Insurance and Credit Guarantee Corporation Act, 1961 to transfer the deposit insurance powers and responsibilities to the Resolution Corporation.
- The Resolution Corporation would protect the stability and resilience of the financial system; protecting the consumers of covered obligations up to a reasonable limit; and protecting public funds, to the extent possible.
- The bill also seeks to give comfort to the consumers of financial service providers in financial distress.
- 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.
- The new bill will complement the Insolvency and Bankruptcy Code, 2016 by providing a comprehensive resolution framework for the financial sector. The Insolvency and Bankruptcy Code, 2016 was enacted recently to deal with the insolvency of non- financial entities
Concerns:
- Among other tools, the FRDI Bill also empowers the Corporation to bail-in the company.
- While a bail-out is the use of public funds to inject capital into an ailing company, a bail-in involves the use of depositors’ funds to achieve those ends.
- This can be done either by cancelling the bank’s liabilities, or converting them into other forms, such as equity.
- This has caused a lot of concern among depositors who are worried they may lose their hard-earned money deposited with banks.
- However, the fact is that the risk is no more or no less than it ever was.
- The Deposit Insurance and Credit Guarantee Corporation provide deposit insurance of up to Rs. 1 lakh.
- The rest is forfeited in the event of a bank failure. The FRDI Bill has not specified the insured amount yet, but it is unlikely to be lower than that amount, as the limit was set way back in 1993.