FRDI bill is expected to be tabled in winter session of the parliament.
But it has raised concerns among depositors on how they would be repaid in case of liquidation of banks.
What is the existing method?
The Deposit Insurance and Credit Guarantee Corporation (DICGC) is an RBI subsidiary, established in 1971.
In case a stressed bank had to be liquidated, the depositors would be paid through DICGC.
It insures all kinds of bank deposits up to a limit of Rs.1 lakh.
It is mandatory for banks to pay a sum to the DICGC as insurance premium.
What are the concerns in the proposed bill?
The proposed Bill seeks closure of the DICGC, as the credit guarantee will be taken care of by the Resolution Corporation.
The Resolution Corporation is empowered to monitor financial firms, calculate stress and take corrective actions in case of a failure.
According to Section 52 of the proposed Bill, depositors will lose their rightful claim to retrieve their savings in case of liquidation of banks and insurance companies.
It does not specify the fixed insured amount to be paid by the bank to the resolution corporation.
It does not even specify the amount a depositor would be paid in case of liquidation.
It is given that corporation may decide on the compensation in case of any bank failure, which could well be less than Rs. 1 lakh.
Bail In - It also proposes 'bail-in' as one of the methods to resolution, where the banks issue securities in lieu of the money deposited.
In the past, the bail-in efforts had largely worked against depositors.
The ambiguities on how the depositors would be repaid needs to be addressed.
Thus, there is a need to enhance insurance cover on deposits which should ideally continue to be managed by the RBI.
