THE FRDI BILL

Indian economy, apart from some minor discrepancies, has seen a positive surge in the past few years. The bombshell demonetization may have slowed down the progress a bit but it has lead to elimination of a humongous amount of black money from the system especially from Construction and Mining. The Pundits have predicted that the current trends in the Indian financial system are pointing towards a better India. These developments are a result of a cumulative effort by The Finance Ministry, Reserve Bank of India and the Indian Banking System. The Banks, being a vital part of life for every individual, have been there for everyone in tough times.
But what if the banks or other financial firms face tough times?  
Keeping this question in mind, the Financial Resolution and Deposit Insurance bill has been framed. The damage control and safety of the banks and their deposits is very much significant as the common man is the depositor and the failure of any bank leads to an impact on the common man.

As stated by the Indian Finance Minister Mr. Arun Jaitley in the Budget speech 2016-17 , “A systemic vacuum existed with regard to bankruptcy situations in financial firms’’ . This bill has been worked out to get over the risk that has been hovering over both depositors and banks from a long time.

Understanding the Bill

To understand this, not so easy, subject, one needs to know about a couple of terms first. So, let’s first understand those terms and then move on to the basic elements of the bill.
 

• Bail-in: This term is used widely in case of economic failures. Bail-in is done to extricate a certain financial institution that is on the verge of becoming insolvent. In Bail-in, the company’s creditors and depositors are made to bear the expenses for the financial institution to get back to ground zero. To remember this, the term “in” refers to inside, therefore, inside money is utilized to make the institution stand again.
• Bail-out:  Bail-outs and bail-ins possess a common objective that is to save a financial institution from sinking into the bankruptcy. The difference is that, in Bail-out, the funds utilized to save the institution are arranged by the government itself, typically out of taxpayer’s money. Although, bail-outs are carried out more often as compared to bail-ins, governments are now diverting their ways, endorsing bail-ins.

The Financial Resolution and Deposit Insurance Bill (FRDI Bill) proposes to formulate an independent corporation which will keep a tight eye on the books of all the financial institutions of the country. This independent body will be called as Financial Resolution Corporation (FRC). FRC will be looking after the various banks, National stock exchange (NSE), Bombay Stock Exchange (BSE), other stock exchanges, Insurance companies and other transaction systems. FRC will contain representatives from all the financial sects of the country along with representatives from The Finance Ministry of India and some independent Directors. This corporation will then form a set of guidelines and rules for all the areas of concern. The FRC will classify the financial firms into five separate categories

 

1. Low risk firm
 

2. Moderate risk firm
 

3. Material risk
 

4. Imminent Risk
 

5. Critical risk to viability

 

The FRC will act as a whistle blower in case they feel that a certain firm is on its way to a collapse due to bankruptcy. This concept is formulated to regulate the whole financial system so as to make it secure. This bill is aimed at boosting the performance of the Indian economy on a global frontier. The FRDI bill also provides for the insurance of depositor’s money and a joint exercise of RBI and FRC for the revision of insurance limits for deposited money.

 

 Present day scene

Scrutiny of Financial System: Presently, RBI and Deposit Insurance and Credit Guarantee Corporation (DICGC) collectively monitor the financial firms and institutions. DICGC, as the name suggests, takes care of the insurance of the deposited money and RBI looks after the performance and other activities going on.

Depositor’s Insurance: Depositor’s Insurance is the part of the deposit that is always secure in case of a collapse of the bank. The current insurance limit for the depositor’s money is placed at 100,000 rupees. This means that, in case of the bankruptcy of a bank, the depositor will only get an amount of 1 lac rupees back as insurance money. This limit was set in the 1978 as an addition to previously passed Deposit Insurance and Credit Guarantee Corporation Act, 1961. An amount of Rs. 100,000 was big at that time but the constant growth over the years has made it a merely small amount and it has never been revised ever since.

How FDRI Bill would benefit the system

Keeping in view, the absence of regulatory body in the Indian financial system, the foundation stone of FRDI Bill was laid. To keep its system end to end with the global competitors, this bill is the need of the hour.

• The FRC will take over the management of the company which, it feels, is probably going to crumble in a short span of time. The Corporation will resolve the matters within an year (can be extended). The resolution will be done according to the damage and debts. Mergers, Bail-ins, Bail outs, transfer of assets or liquidation. 
• By the formation of FRC, the DICGC will be dissolved and RBI will be relieved of some of its duties which include observation of financial firms. This way the workload on RBI will get reduced and it’ll be able to perform and manage the other tasks more efficiently.
• The Depositors, particularly, will be the bigger beneficiaries if this bill is passed and the provisions are executed.
• The formation of FRC will make the financial status of every firm crystal clear and hence bring transparency for the benefit of investors, creditors and depositors.
• The FRDI bill provides for the bail-ins and bail-outs to be performed in case of the bankruptcy. India has not seen such a bankruptcy since 1961. So major bail-ins and bail-outs are unlikely to occur. Most of the resolutions will be done through mergers, assets or other smaller operations.
• The FRDI bill provides for exclusion of Fixed Deposits and term deposits from the bail-ins and bail-outs. So the most common type of deposits will still be safe even if the firm fails.
• The depositor’s money will now be more secure than it was in the past as the deposit insurance limit is most likely to be increased.

Critics:

• The Financial Resolution and Deposit Insurance Bill (FRDI Bill) has received mixed reactions from the masses. While some have lauded the bill, stating that this will make the financial system stronger, others have maintained that the execution of the points made by the bill will put the depositors at risk.
• Large scale spreading of fake news on social media and the internet has created a misconception that the bill cares more about companies and not the common man.
• Consent has also been a major factor leading to a rise in opposition of the bill.
• People are worried for their money being taken away without their prior permission.

Verdict

If closely observed, the bill is very much needed and will be a milestone in the history of Indian Financial System.

• The bill will regulate the financial wellness of the firms and the FRC will scrutinize the whole system. This will eventually result in a better and a competitive system.
• A statement regarding the bill says, "Bail-in does not imply that this tool can be used at the government's whim and fancy to arbitrarily use depositors' money without their consent to save failed banks’’. So people don’t have to worry about their money anymore.

This bill is still being reviewed by a Joint Parliamentary committee and is to be proposed in the winter session of the parliament which started on Dec 15, 2017. If this bill is passed with minor changes and the desired events are executed with proper planning and management, this bill will change the final system of this country. Sooner or later, the FRDI Bill will prove to be a game changer in the economic management of the country.

 

JAI HIND