Financial Regulatory and Deposit Insurance (FRDI) Bill:
- This Bill is similar to the Insolvency and Bankruptcy Code, 2016, which was enacted last year.
- Both of these are about issues that can arise when companies go bankrupt or insolvent, except that this Bill deals only with the companies that are in the financial sector.
- The insolvency code Act deals with companies in all other sectors.
- The FRDI will provide a comprehensive resolution framework to deal with bankruptcy situations in financial sector entities such as banks and insurance companies.
What the Bill offers?
- FRDI Bill, 2017 seeks to protect customers of financial service providers in times of 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 Bill would help in maintaining financial stability in the economy by ensuring adequate preventive measures, while at the same time providing the necessary instruments for dealing with crisis events.
- The Bill aims to strengthen and streamline the current framework of deposit insurance for the benefit of retail depositors.
- Further, it seeks to decrease the time and costs involved in resolving distressed financial entities.
- Once enacted, a resolution corporation will be setup to strengthen the stability and resilience of the entities in the financial sector.
Clarification given by the Government:
- Depositors will be given preferential treatment in the event of liquidation of a bank, and the controversial bail-in clause will be used only with the prior consent of depositors.
- The bail-in clause would not be applied to public sector banks, and it would be a tool of last resort — when a merger or acquisition is not viable — in the case of private sector banks.
- The government reiterated its implicit guarantee for the solvency of public sector banks.
Current practice:
- Under current laws, deposits with banks are insured up to 1 lakh. Under the FRDI law, the Resolution Corporation is empowered to increase this deposit insurance amount.
Bail-in clause explained:
- In case a bank or an insurance firm or a mutual fund failed and it was not possible to revive it by any other means such as a merger, then depositors money could be used to revive the entity after depositors are given back up to Rs 5 lakh from their deposits, bonds, policies or mutual funds with that entity.
- The rest of the money would be converted into a long-term bond backed by the government and used for the bail-in.
Source: