The Central Government is expected to table the Financial Resolution and Deposit Insurance Bill, 2017, or FRDI Bill, in the upcoming Winter Session of Parliament. Reportedly, the bill is going to be a landmark reform in the financial sector, to be introduced in order to curb the menace of Bankruptcy and Insolvency Code, re-capitalisation of Public Sector Undertaking banks, and Foreign Direct Investment in insurance.
However, prior to its introduction, the bill is facing a lot of flak from the bank unions as well as the opposition.
In August, several bank employees went on a strike against this proposed legislation and several depositors also raised their concerns.
What is FRDI Bill?
The FRDI Bill is set to create a framework for resolving bankruptcy issues in banks, insurance companies, and other financial entities.
The bill was earlier introduced in the Monsoon Session but was then referred to a joint parliamentary committee for further review. The Reserve Bank of India (RBI) Governor Urjit Patel was asked to brief the panel on the Bill.
The committee will now submit its report during the Winter Session, after which an amended Bill is expected to be tabled.
In a bid to monitor financial firms, calculate stress and take “corrective actions” in case of a failure, the bill proposes to establish a ‘Resolution Corporation’. This Corporation will categorize financial firms as per their risk factors as low, moderate, material, imminent, and critical. In case of critical firms, the Corporation will be entitled to take over and resolve the problems within a year.
The Bill empowers the Corporation to initiate corrective measures such as merger or acquisition, transferring the assets, liabilities to another firm, or liquidation.
What is the Existing method?
In India regulators such as the RBI and the Insurance Regulatory and Development Authority (IRDAI) were always responsible for handling the resolutions as no other authority was specifically designated to perform it. In the past, the RBI had directed the PSUs to take over stressed banks in a bid to protect the depositors and employees.
In 1971, the Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, was established to ensure all kinds of bank deposits upto a limit of Rs 1,00,000. If a stressed bank had to be liquidated, the depositors would be paid through DICGC.
However, the proposed Bill seeks to shut the DICGC. The Resolution Corporation will now be taking care of the credit guarantee.
Key issues under the proposed Bill
The proposed Resolution Corporation will be functioning under the Ministry of Finance in association with the representatives from SEBI, RBI, IRDAI, and PFRDA. The Union Government will be appointing the Chairperson, two independent members and other members of the Board.
The Bill provides the Corporation with one year of time to resolve issues in a ‘critical’ firm. It has provisions to extend this time frame to another year. As per the guidelines,the Corporation may layoff the number of employees in the stressed firm, transfer them or issue pay-cuts. The firm would be liquidated within two years after the Corporation’s intervention.
“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.
The bail-in clause
The Bill proposes ‘bail-in’ as one of the methods for resolution, where the banks will issue securities instead of the money deposits. Reports suggest that earlier the bail-in efforts had largely worked against depositors.
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 per cent as of March 2017. The RBI had recommended that banks initiate insolvency proceedings for 12 large defaulters, constituting 25 per cent of the system’s Non-Performing Assets(NPAs).