Financial Resolution and Deposit Insurance Bill (FRDI) proposed by union government has been misinterpreted. Click here to know about the concerns with FRDI
It is actually a tool of resolution without taking away the implicit guarantee to depositors.
What is the need for FRDI?
Banks have become a repository of public faith in the financial system.
Failure of a bank has repercussions that go well beyond savings and lending, it has an impact on the systemic stability of a country.
Thus rules for bankruptcy of a regular business cannot be applied to bank failures.
The FRDI Bill is an attempt to make the system more credible, less chaotic, and systematic in times when credibility is at risk, by treating banks differently from regular corporations.
What are the positives in the law?
Resolution Corporation -The Bill brings in a system of risk-based monitoring of financial institutions.
At the stage of ‘critical’ risk to viability, the proposed Resolution Corporation is empowered to takes all the decision not the banks.
The Resolution Corporation can use “bail-in” clause only in consultation with the regulator (RBI).
Curtailing the power - During global financial crisis 2008, governments used tax-payer money was used to recapitalise the banking industry.
The Bill makes it explicitly clear that only such liabilities may be cancelled where the liability/instrument contains a bail-in provision.
Transparent -It makes it clear that the Resolution Corporation will specify the liabilities to be bailed in and that will be put up in the public domain before finalisation.
Creditors/depositors will need to consent in advance to have their liabilities bailed-in.
Accountable -Even when liabilities are being bailed in, the Bill makes it incumbent upon the Resolution Corporation to follow the prescribed route.
Here, uninsured depositors are placed higher over unsecured creditors and amounts due to the Central and State governments.
Guaranteed compensation - FRDI Bill gives aggrieved persons a right to be compensated by the Resolution Corporation if any of the safeguards have not been followed during a bail-in or in the conduct of any other resolution action.
