The Financial Resolution and Deposit Insurance Bill, 2017 was introduced in Lok Sabha during Monsoon Session 2017. The Bill is currently being examined by a Joint Committee of the two Houses of Parliament. Under this bill a new entity called ‘Resolution Corporation’ is established, which in case of failure of financial firms such as banks and insurance companies will monitor the risk faced by such firms and resolve them. The RC will consist of representatives from all financial sector regulators, the ministry of finance and some independent Directors of repute.
The RC will put in place rules that will classify financial firms into five categories based on their risk of failure: low, moderate, material, imminent and critical risk to viability. Over the last few days the main topic of discussion among financially literate Indians are of that whether FRDI Bill is boon or bane and to analyze this we have to understand the modalities of the bill.
Under this bill there are various methods of resolution to revive a failing financial firm, they are:
Merger & Acquisition
Bridge Service Provider
However it is the Bail-in clause that has got the limelight, so let us first understand what is Bail-in.
Bail-in is a method by which a financial firm which is on the verge of failure is rescued by internal restructuring of its debt. Under bail-in, the Resolution Corporation can internally restructure the firm’s debt by:
Cancelling liabilities that the firm owes to its creditors, or
Converting its liabilities into any other instrument (e.g., converting debt into equity), among others.
So the main concern for the depositors is that whether their hard earned money deposited will be used by these failing financial firms for internal restructuring. The Answer for this question according to financial experts and pundits is a big NO.
The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures bank deposits up to Rs 1 lakh. The Proposed Bill has a similar provision which allows the Resolution Corporation to set the insured amount in consultation with the RBI, which is most likely to be higher than 1 lakh due to the rising inflation index. Moreover the bail-in provisions can be imposed only if the depositor has given his consent to the bank when they have signed the deposit forms. So the depositors need not panic as protection is provided in the bill.
Another question on everyone’s mind is whether India needs such legislation?
The answer to this question is a big YES because a developing country like India needs a legislation to regulate and classify the financial firms on the basis of risk and when that risk becomes high, put in place a rule-based system to resolve the crisis through a resolution.
The Global Trust Banks Failure and its subsequent merger with the Oriental Bank of Commerce, Bank of Rajasthan’s merger with ICICI Bank and the current saga of Sahara Life further emphasize the need for the proposed legislation. It also reduces the burden of RBI to some extent. Many Countries such as the US and those across the Europe after the global financial crisis in 2008 has developed specialized resolution legislation. The Financial Stability Board, an international body comprising G20 countries (including India), recommended that countries should allow resolution of firms by bail-in under their jurisdiction. However, this method has rarely been used. Although Cyprus used the Bail-in Provisions to resolve a bank crisis in 2013. Taking all these factors & expert views into consideration, we can conclude that the FRDI Bill 2017 is certainly a BOON in the making.
(Author – CS S.Abhinav, Company Secretary from New Delhi and can be contacted at firstname.lastname@example.org)
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