Modi Govt to drop FRDI bill to calm jittery depositors ahead of 2019 elections

NEW DELHI, JULY 18: The government has decided to drop the controversial Financial Resolution and Deposit Insurance (FRDI) Bill, thus allowing bank customers to breath easy.

The Union Cabinet, which met on Wednesday, decided to drop this Bill, a senior Cabinet Minister told BusinessLine. This means the present system of insurance deposits will continue and customers will not have to worry about the ‘bail-in’ provision in the proposed Bill.

Since introduction and any change thereafter in the Bill would have required Cabinet approval, dropping the Bill also required it.

Two clauses

The Bill was introduced in the Lok Sabha on August 10, 2017, and then sent to the Joint Committee of the Parliament, which is yet to submit its report. There were two controversial clauses in the Bill: a bail-in provision and an insurance on deposits.

The bail-in provision stipulated that if a bank fails, depositors will have to bear part of the liability. Technically speaking, this provision says, “It amounts to liabilities’ holders bearing a part of the cost of resolution by reduction in their claims.”

The government repeatedly said that the bail-in provision “may not be required to be used in case of any specific resolution. Most certainly, it will not be used in case of a public sector bank as such a contingency is not likely to arise,” Nevertheless, it angered depositors and invited criticism from opposition parties.

Currently, deposits are insured up to ₹1 lakh. The Bill proposed to delete the legal provision for the present insurance system and defined this protection in a new way. Here, too, the government made it clear that “similar protection would continue under the FRDI Bill and the Resolution Corporation is empowered to increase the deposit insurance amount.”

It also said that under the provisions of the FRDI Bill, in case of liquidation of a bank, the claims of uninsured depositors will be higher than those of unsecured creditors and government dues. Therefore, “the rights of uninsured depositors will be better protected… in the FRDI Bill.”

However, the perception was that there would not be any insurance cover, which prompted the opposition attack. Also, many advocacy leaders advised the government to withdraw the Bill as it had not been well-received. “In an election year, it would not be correct to go ahead with such a controversial Bill,” a Minister said.

Arguing for the provision, the Finance Ministry had said that there was no comprehensive and integrated legal framework for resolution, including liquidation, of financial firms in India. The power to restructure public sector banks, and regional rural banks was with the Centre.

Resolution regime

The current resolution regime is especially inappropriate for private sector financial firms in the light of significant expansion and many of these acquiring systemically important status in India. With the Insolvency and Bankruptcy Code, 2016, a comprehensive resolution regime for non-financial firms mainly has come in, but there is no such mechanism for financial firms.

This Bill intended to provide a comprehensive resolution regime that would help ensure that, in the event of failure of a financial service provider, there is quick, orderly and efficient resolution in favour of depositors.