The Financial Resolution and Deposit Insurance (FRDI) Bill - The cause of concern among one and All

The Financial Resolution and Deposit Insurance FRDI Bill

Since Independence, Bank Fixed Deposits is one of the most popular investment options for common men in India. However, recent changes in the economic trends & Government policy has compelled common men to rethink about the their most favourite investment avenue. Moreover, the recent bill tabled in the parliament called the Financial Resolution and Deposit Insurance (FRDI) has caused lot of rumours and concerns among common men. If this bill is passed, Bank FD may become one of the least preferable investment option among small house hold investors in India.

What is the Financial Resolution and Deposit Insurance (FRDI) Bill?

Since the financial crises of 2008 leading to many incidences of large scale bankruptcies, bank frauds and ever increasing non-performing assets (NPA) of Indian banks have been observed. This has weakened the Indian Banking and Financial System. This not only leads to high risk of financial losses among investors but also create a very negative impression among international investors. In the wake of these risks, The Central Government has tabled the FRDI bill in the parliament.
The Bill seeks to protect the weakening banking and financial system in India. However, the Insolvency and bankruptcy Code stated in the bill is the cause of major concern among all and sundry. The bill provides for the replacement of existing Deposit Insurance and Credit Guarantee Corporation with a new Resolution Corporation. The main function of Resolution Corporation is to monitor Banking and Non-Banking Financial Organisations. It is also responsible for analysing the potential risk of their failure and taking corrective actions in case of any incidence of failure. Moreover, the Resolution Corporation would provide insurance cover to the deposits up to certain limit. The limit of deposit insurance is not fixed yet; however, it is widely believed to be not exceeding 2 lakh rupees.

What is Bail-In Provision:

The most important concern about the Bill is the Bail-in provision. While the Bail-out of a financial institution means to fuse in public funds (from outside the institution) to strengthen a sick financial unit the bail-in a financial institution means to use the funds deposited with the bank or the institution by the investors and depositors to meet the losses suffered by the institutions. This may be done by either converting the deposits into equity or in the worst case scenario, cancelling the bank liabilities. This implies that in case of a large scale default or fraud in the bank, the depositors may not get all their deposits back.

However, the Government has ensured that the bail-in option shall be exercised as the last solution. If a financial institution becomes critical, the Resolution Corporation will take over the institution and prepare a resolution plan. The resolution plan may last for up to 24 months. Apart from Bail-In, many other options like mergers, transfer of assets and liabilities to another entity, a bridge financial firm (where a new company is set up to take over the assets, liabilities and management), or liquidation via the National Company Law Tribunal are also proposed in the bill are also proposed.

After much hues and cries in the media about the bail-in provision, the Finance Ministry has posted on Twitter as follows: “Government of India assures the security of the money deposited in the banks. The government of India is strengthening rights of depositors like never before, special care being taken of small depositors.” Finance Minister Arun Jaitley has also hinted possibilities for changes in the proposed bill. He has also ensured that even if the bill is passed with bail-in provision, such action shall be taken in a very rare case scenario and only as the last solution. According to Arun Jaitley's statement, government plans to infuse Rs. 2.11 lakh crore into the banking system to strengthen the banks in order to minimise the failure. However, if the FRDI is passed in the parliament along with Bail-In Provision, it will undoubtedly expose the deposits of the common men to risk beyond the insured limit. In such case, depositors are advised to diversity their risk by not depositing more than insured amount in a single bank. Also, common man should consider other investment and saving options like mutual funds and equity investment.

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