Controversial FRDI

Financial Resolution and Deposit Insurance Bill soon to be reintroduced by Centre – Free PDF Download


 

  • Finance ministry in process of finalising certain provisions like the ‘bail-in’ clause,
  • which had triggered uproar that forced the legislation to be withdrawn in 2018.
  • The central government may reintroduce the controversial Financial Resolution and Deposit Insurance (FRDI) Bill in the next financial year, seeking to establish a resolution framework for a certain category of distressed financial institutions, including systemically important ones.

“bail-in” clause,

  • which had triggered uproar over indications that customers of a failing financial institution would have to bear part of the cost of resolution by reduction in their claims.
  • The need to redraft the bill is felt as currently, there is no resolution framework for banks and systemically important financial institutions.
  • The routine insolvency process will not be able to handle it if a bank were to collapse

  • The bill, which was first introduced in the Lok Sabha in 2017 and later referred to a joint parliamentary committee, was withdrawn in August 2018 after uproar among Opposition parties and unions of state-owned banks and insurance companies.
  • Last year, Finance Minister Nirmala Sitharaman had said that the government had not taken a decision to reintroduce the bill in Parliament.
  • The legislation will also provide for an insurance of up to Rs 5 lakh for bank depositors, which already has a legal backing.
  • The Lok Sabha had, in the last session of Parliament, passed a bill called the Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021,
  • which ensures that bank account holders get up to Rs 5 lakh from the Deposit Insurance and Credit Guarantee Corporation within 90 days of the Reserve Bank of India (RBI) imposing moratorium on their banks.

Discussions on supervisory powers

  • According to the government official, while the draft is ready, discussions are happening around whether the resolution authority will get supervisory powers and would not have to wait for the RBI’s direction to take action against a financial institution on the brink of insolvency.
  • In 2019, after the fall of Infrastructure Leasing & Financial Services Limited, the government, in consultation with the RBI, had brought in a special framework under which all non-banking financial firms over a Rs 500 crore asset size would come under the purview of the Insolvency and Bankruptcy Code (IBC) for resolution.
  • The government had then said that the special framework provided under Section 227 of the IBC for financial service providers would serve as an interim mechanism to deal with any exigency pending introduction of a full-fledged financial resolution mechanism for banks and other systemically important financial service providers.
  • brought in to create a single agency for resolution of financial firms such as banks, insurance companies, non-banking financial companies (NBFCs) and stock exchanges in case of insolvency.

two controversial clauses

  • Bail-in provision- This provision stipulated that if a bank fails, depositors will have to bear part of the liability.
  • Insurance on deposits- The Bill proposed to delete the legal provision for the present insurance system wherein deposits are insured up to Rs. 1 lakh and empowered a newly created body the Resolution Corporation to decide the deposit insurance amount.

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