FRDI Bill was introduced in Parliament during Monsoon Session 2017.
What are financial firms?
Financial firms include banks, insurance companies, and stock exchanges, among others.
Since they transact with each other, their failure may have an adverse impact on financial stability and result in consumers losing their deposits and investments.
e.g In 2008, the failure of a Lehman Brothers impacted the financial system across the world.
Currently, there is no specialised law to resolve financial firms.
Provisions to resolve are found scattered across different laws.
What are the highlights of the bill?
The Bill seeks to create a consolidated framework for the resolution of financial firms.
It repeals the Deposit Insurance and Credit Guarantee Corporation Act, 1962 and amends 12 other laws.
Resolution Corporation - The central government will establish a Resolution Corporation.
The Corporation will have a Chairperson and its members will include representatives from the Finance Ministry, RBI, and SEBI, among others.
The Corporation will-
Provide deposit insurance to banks
Classify service providers based on their risk, and
Undertake resolution of service providers in case of failure.
It may also investigate the activities of service providers, or undertake search and seizure operations if provisions of the Bill are being contravened.
Risk based classification - The Corporation, in consultation with the respective regulators specify criteria for classifying service providers based on their risk of failure.
A service provider categorised under the ‘imminent’ or ‘critical’ category will submit a restoration plan to the regulator, and a resolution plan to the Corporation. These plans will contain information, including: (i) details of assets and liabilities, (ii) steps to improve risk based categorisation, and (ii) information necessary for resolution of the service provider.
Administration - The Corporation will take over the management of the service provider from the date when it is classified as ‘critical’.
Resolution - The resolution of a service provider classified under the ‘critical’ category can be done by using
Transfer of its assets and liabilities to another person,
Merger or acquisition, and
Creating a bridge financial,
Bail-in and
Liquidation
Time limit - The service provider will automatically be liquidated if its resolution is not completed within the maximum time period of two years.
Liquidation and distribution of assets - The Corporation will require the approval of the National Company Law Tribunal to liquidate the assets of a service provider.
Offences - The Bill specifies penalties for offences such as concealment of property, and destruction or falsification of evidence.
Does the Bill guarantee the repayment of bank deposits?
Currently, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides deposit insurance for bank deposits up to 1 lakh rupees per depositor.
The Bill proposes to subsume the functions of the DICGC under the Resolution Corporation.
It will guarantee the repayment of a certain amount to each depositor in case the bank fails.
