Understanding The Financial Resolution And Deposit Insurance Bill: A Comprehensive Guide

The Financial Resolution and Deposit Insurance (FRDI) Bill was a proposed legislation in India that aimed to address the issue of insolvency in financial companies. The bill was first introduced in 2017 and sought to establish a Resolution Corporation to monitor financial firms, anticipate the risk of failure, take corrective action, and resolve them in the event of failure. The bill also included a controversial bail-in clause, which was perceived as undermining the safety of depositors, leading to its withdrawal in 2018. However, in 2024, discussions emerged about potentially introducing a modified version of the bill to address the need for a legislative backing for the entire financial sector.

The bill establishes a Resolution Corporation to monitor financial firms

The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill) was introduced in Lok Sabha on August 10, 2017. The Bill establishes a Resolution Corporation to monitor financial firms, anticipate the risk of failure, take corrective action, and resolve them in case of failure. The Resolution Corporation will be comprised of 11 members, including a Chairperson, representatives from financial sector regulators and the Ministry of Finance, members appointed by the central government, and independent members.

The Resolution Corporation will classify financial firms into five categories based on their risk of failure: low, moderate, material, imminent, and critical. Once a firm is classified as critical, the Resolution Corporation will take over its management and resolve the firm within one year, which may be extended by another year. Resolution methods include merger or acquisition, transferring assets and liabilities to a temporary firm, or liquidation. If resolution is not completed within two years, the firm will be liquidated.

The Resolution Corporation will also provide deposit insurance up to a certain limit in the case of bank failure. This will be facilitated by three funds: the Corporation Insurance Fund, the Corporation Resolution Fund, and the Corporation General Fund.

The FRDI Bill was withdrawn in 2018 due to concerns over the controversial "bail-in" clause, which was perceived as undermining the safety of depositors' money. The government is now contemplating a modified version of the Bill to address insolvency in financial firms.

The Resolution Corporation will classify financial firms based on their risk of failure

The Financial Resolution and Deposit Insurance Bill, 2017 was introduced in the Lok Sabha on August 10, 2017. The Bill establishes a Resolution Corporation to monitor financial firms, anticipate the risk of failure, take corrective action, and resolve them in the event of failure. The Resolution Corporation will classify financial firms into five categories based on their risk of failure: low, moderate, material, imminent, and critical. The classification will be based on objective criteria such as the adequacy of capital and debt.

The Resolution Corporation will take over the management of a financial firm once it is classified as "critical". It will resolve the firm within one year, which may be extended by an additional year. Resolution may be undertaken through methods such as merger or acquisition, transferring the assets, liabilities, and management to a temporary firm, or liquidation. If resolution is not completed within a maximum of two years, the firm will be liquidated.

The Resolution Corporation will exercise certain powers, including the classification of firms based on risk and directing the management of a firm to return performance-based incentives. However, the Bill does not specify a review or appeal mechanism for aggrieved persons to challenge the decisions of the Resolution Corporation.

The Resolution Corporation will comprise 11 members: a Chairperson, a representative each from regulators (RBI, SEBI, IRDA, and PFRDA), a representative of the Ministry of Finance, three members appointed by the Central Government, and two independent members. The Chairperson and members will have expertise in subjects including finance, economics, and resolution.

The bill provides for establishing a resolution authority

The Financial Resolution and Deposit Insurance Bill, 2017, was introduced in Lok Sabha on August 10, 2017. The Bill establishes a Resolution Corporation to monitor financial firms, anticipate the risk of failure, take corrective action, and resolve them in case of failure. The Resolution Corporation will comprise 11 members with expertise in finance, economics, and resolution.

Resolution of financial firms may be undertaken using methods such as merger or acquisition, transferring the assets, liabilities, and management to a temporary firm, or liquidation. If resolution is not completed within a maximum of two years, the firm will be liquidated, and the Bill specifies the order of distributing liquidation proceeds.

The Resolution Corporation will exercise certain powers, including the classification of firms based on risk and directing the management of a firm to return their performance-based incentives. However, the Bill does not specify a review or appeal mechanism for challenging the decisions of the Resolution Corporation.

The Resolution Corporation will also provide deposit insurance of up to a certain limit in case of bank failure. The legislation will provide for insurance of up to Rs. 5 lakh for bank depositors, which already has legal backing. The Resolution Corporation will subsume the functions of the Deposit Insurance and Credit Guarantee Corporation, which currently provides deposit insurance of up to one lakh rupees.

The bill was withdrawn due to concerns over the safety of deposits

The Financial Resolution and Deposit Insurance (FRDI) Bill was withdrawn in 2018 due to concerns over the safety of deposits. The bill, introduced in 2017, was intended to address the issue of insolvency in the financial sector. It aimed to establish a resolution framework for distressed financial institutions, including banks, insurance companies, non-banking financial companies, pension funds, and stock exchanges. However, one of its provisions, known as the "bail-in" clause, sparked widespread controversy and criticism.

The "bail-in" clause suggested that in the event of a bank's insolvency, depositors would be required to bear part of the cost of the resolution by reducing their claims. This provision was perceived as undermining the safety of depositors' funds, as it indicated that their money could be used by failing financial institutions to stay afloat. The public expressed concerns that their deposits were not adequately protected, and opposition parties criticised the bill as being anti-people and anti-poor. Despite assurances from the Central government and the prime minister that the bill would not adversely affect depositors, the controversy surrounding the "bail-in" clause led to the bill's withdrawal.

The lack of clarity regarding the protection of existing levels of deposit insurance for smaller deposits further contributed to the criticism. At the time, deposit insurance was available for all deposits up to ₹1 lakh, but it was unclear if this would be continued under the new bill. This uncertainty, coupled with the perceived threat to depositors' funds, led to the decision to withdraw the bill and maintain the status quo on deposit insurance.

The bill repeals the Deposit Insurance and Credit Guarantee Corporation Act, 1961

The Financial Resolution and Deposit Insurance Bill, 2017, was introduced in Lok Sabha on August 10, 2017. The Bill sought to establish a Resolution Corporation to monitor financial firms and resolve them in case of failure. It repealed the Deposit Insurance and Credit Guarantee Corporation Act, 1961, and amended 22 other laws.

The Deposit Insurance and Credit Guarantee Corporation Act, 1961, established the Deposit Insurance and Credit Guarantee Corporation (DICGC) as a specialised division of the Reserve Bank of India, under the jurisdiction of India's Ministry of Finance. The DICGC was established to provide insurance for bank deposits and guarantee credit given by banks and financial institutions. The DICGC insures all bank deposits—such as savings, fixed, current, and recurring deposits—up to a limit of 500,000 rupees for each depositor in a bank. The insurance premium is paid by the insured banks themselves, meaning that depositors or customers of banks receive the benefit of deposit insurance protection free of cost.

The Financial Resolution and Deposit Insurance Bill, 2017, proposed the establishment of a Resolution Corporation that would comprise 11 members: a Chairperson, a representative each from the country's financial regulators, a representative of the Ministry of Finance, three members appointed by the central government, and two independent members. The Resolution Corporation would be responsible for classifying financial firms based on their risk of failure, undertaking resolution or liquidation of financial firms in case of failure, providing deposit insurance to consumers, and monitoring systemically important financial institutions.

The Bill was withdrawn in 2018 due to concerns over the safety of deposits, particularly the controversial bail-in clause, which was perceived as undermining the safety of depositors. The bail-in clause stated that in the case of insolvency in a bank, depositors would have to bear part of the cost of the resolution by a corresponding reduction in their claims.

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