FRDI Bill: Getting the Act right

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The FRDI Bill is a milestone reform aimed at NPA resolution. However, ambiguity in the clauses must be resolved to safeguard the interests of depositors

Hope for the best but be prepared for the worst — this adage is what the Government hopes to follow and achieve with the new Financial Resolution and Deposit Insurance (FRDI) Bill, 2017. This Bill is touted to be another milestone and a ‘braveheart' reform in the series of economic reforms by the present Government.

The Bill was submitted to a joint parliamentary committee for review, and the committee got an extension to submit its report on the Bill by the last day of the Budget Session 2018. Thus, it is unlikely to be tabled in the present Budget Session. Nevertheless, the Bill was widely criticised earlier mainly because the interests of the depositors and employees do not seem to be protected due to the powers vested in the new set-up created through it. The FRDI Bill seeks to constitute a ‘resolution corporation' whose affairs and business will be managed by a board, with members nominated by the Union Government representing (i) the Ministry of Finance, the Reserve Bank of India (RBI), the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority; (ii) three whole-time members appointed by the Union Government; and (iii) two independent members. The resolution corporation will, thus, work under the Finance Ministry.

Till now, the RBI is regarded as the regulator and the watchdog of the Indian banking sector. With the establishment of resolution corporation, the scope of authority of the RBI (an autonomous institution) definitely seems to be undermined as far as its role as a regulator is concerned, as all the matters concerning the restructuring of sick/unviable financial institutions will be under the scope of the resolution corporation.

The Bill states that the resolution corporation will be established with the aim of providing deposit insurance to the depositors; specify the liabilities or classes of liabilities of a specified institution that may be subject to a bail-in; inspect and regulate ‘risky' financial service providers; besides categorising the financial institutions on the basis of risk to viability as low, moderate, material, imminent and critical. It also details the measures taken by appropriate regulators in cases where the institutions are categorised into various ‘risk categories’. The categorisation of various financial institutions into different categories will help the concerned regulators to take timely measures with respect to financial institutions falling into high risk categories. If the same information is made public, it can also serve as a potential ‘warning-signal' for the common public and stakeholders.

Presently, the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the RBI, insures the deposits with financial institutions up to a limit of one lakh rupees, inclusive of interests. This limit was increased from Rs 30,000 to the present one lakh rupees on May 1, 1993, but needs to be further increased to a reasonable amount. According to data on the DICGC’s website, 92 per cent of total accounts are fully protected and constitute 30 per cent of the total deposits. Increasing insurance cover further will bring in ambit some of the remaining eight per cent of accounts constituting 70 per cent deposits. The Government should ensure that this is done and the is amount specified in the present Bill.

The resolution corporation can adopt mergers/acquisitions/liquidation as corrective measures for a sick financial institution, while during the process, employees of these financial institutions can be given ‘pay cuts' or ‘pink slips’ as the case may be. This is making the employees anxious and, therefore, the Government can include clauses which will secure the livelihood/interests of the people. The ‘bail-in' clause and Section 52 of the Bill will require the failed banks to bail themselves out by converting deposits (liabilities for the banks) into securities and distribute the same to its creditors to reduce its liabilities.

The absence of clarity in the above clauses is being seen as something that would make the simple act of depositing savings into banks as a ‘risky proposition'. This ambiguity needs to be removed if the aim of the Government is to ensure that the financial sector is protected from crisis like that of 2008 in the US.  It should be clearly specified in the clauses that it would be the responsibility of the resolution corporation to ensure that the interests of the depositors and employees would be best protected in case of any eventuality. This will ensure that the public perceives that the aim of the Bill is to be ‘prepared' for the times of crisis.

The FRDI Bill comes in at a time when the Indian banking sector is reeling under crisis of mounting non-performing assets (GNPAs stood at 9.6 per cent as of March 2017, as per the RBI's Financial Stability Report released in June 2017). No Government can afford the loss of credibility of the country's banking system. Therefore, it is necessary that ambiguity in the clauses is resolved so that the FRDI Bill is perceived as a safeguard for depositors and not as a ‘rescue' measure for failing financial institutions.

(The writer is Associate Professor and programme co-ordinator, Amity School of Economics)

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