ASHISH BHALLA LISTS DOWN THE IMPORTANT POINTERS OF FRDI BILL
The Financial Resolution and Deposit Insurance (FRDI) Bill was approved by the Union cabinet for dealing with the burning issue of corporate bankruptcies which had been bugging the Indian economy for quite some time now. The bill especially concentrates on issues which arise in the aftermath of insolvency reported by companies such as insurance organizations and banks. However, Ashish Bhalla rightly points out at the massive controversies this bill has been creating since the very onset which is spreading like a wildfire amongst masses who are unaware of all its provisions.
Two Telugu states of Telangana and Andhra Pradesh came under the radar lately as banks whined about acute cash crunch in their reserves since everyone started withdrawing their funds in the face of the FRDI Bill launch. Ashish Bhalla says customers are afraid that their deposits shall be used by the banks for bailing-in which also led to the downing of shutters by ATMs following non-availability of cash.
- Reasons Behind The Launch Of FRDI Bill
- A regulation was felt to be an absolute necessity back in 2008 in the aftermath of an array of high-profile bankruptcies which shook the financial community to the core. The FRDI bill was thus devised to bring relief to the distressed financial entities since the government felt that it was imperative to protect the savings and interests of common men who had parked their surplus in the banking sector with an aim of gaining returns.
- Provisions Of The Bill
Ashish Bhalla reveals that it has been made mandatory by the FRDI Bill to set up a resolution corporation which will replace the prevailing Deposit Insurance and Credit Guarantee Corporation. Financial firms will be monitored by the body which will take corrective action in anticipation of any risk of failure for resolving the same. Deposit insurance shall also be provided by the corporation up to a certain limit on the unfortunate case of a bank failure. This limit has yet not been specified by the concerned authorities. The body shall also be entrusted with the task of classifying financial firms in accordance with their risk of failure i.e. — low, moderate, material, imminent and critical. The body shall take over the company’s management if it is deemed to be in a critical stage.
- Controversies Surrounding The FRDI Bill Provisions
The Corporation has been empowered by the FRDI bill to bail-in a financial entity on the probable occurrence of insolvency or bankruptcy. It is imperative to note here that the concepts of bail-in and bail-out are completely different from each other. Under a bail-out scheme, public funds are utilized for injecting the requisite capital into a struggling company. A bail-in, on the other hand, makes use of funds belonging to the depositor for achieving the same. Ashish Bhalla cites the example of writing off the liabilities of a bank or conversion of the same to other forms such as equity as probable bail-in tactics.
This provision has triggered concern amongst the common people who are afraid of losing their hard-earned savings. However, the government has released numerous statements for alleviating the fears of common man. The Bill has even stated that additional protections are being offered to the depositors for maintaining the desired level of transparency.
Bank depositors holding up to 1 lakh INR in their accounts have been guaranteed complete protection by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Depositors holding more than 1 lakh INR shall be treated in accordance with the claims of unsecured creditors. Thus, depositor claims shall be paid only after the preferential payments have been made on the unlikely liquidation of a bank. Losses shall first be absorbed by the equity on a likely bank failure if the FRDI Bill is passed. Next, the bail-in scheme shall be made applicable on the subordinated debt amount. Thus, the implicit guarantee of the government will remain unaffected for public sector banks.
- More Report Submission Time
A time extension shall be granted to the joint parliamentary panel who has been looking into the FRDI legislation regarding timely submission of a report on the same. An extension was provided to the committee in last December.
- Conclusion
Ashish Bhalla amidst all this confusion, it being repeatedly clarified by the government that the ultimate aim of the bill is protection and enhancement of the existing rights of the depositor. However, the present layer of protection offered to them shall also remain in place. Bail-in is just one of the numerous resolution tools which accompany the FRDI bill but does not have a high probability of being used by public banks since chances of such contingencies are absolutely negligible. Nonetheless, the government is not prevented by the bill from financing banks and offering them resolution.
