Union government has decided to withdraw the Financial Resolution and Deposit Insurance (FRDI) Bill.
What is FRDI Bill?
It aims to limit the fallout of the failure of institutions like banks, insurance companies, non-banking financial companies, pension funds and stock exchanges.
The FRDI Bill is aimed at insuring the money of a bank’s depositors in the case of an eventuality where the bank would have to be liquidated.
Bail-in clause of the bill gives banks the authority to issue securities in lieu of the money deposited.
According to this insurance option covers only Rs.1,00,000 of the principal, the remainder of the sum deposited with a bank will be converted to tradable financial assets which can be redeemed.
What are the reasons behind the withdrawal of the bill?
Objections - The Union cabinet decision follows strong objections from several quarters about quite a few provisions of the Bill.
Unions of workers in nationalised banks and in state-run insurance companies were particularly vociferous in their objections.
Poor drafting - The bail-in provision was poorly drafted, with insufficient transparency in the text.
There was also ambiguity about the scope of deposit insurance, Given that, this provision served as a poison pill for the Bill as a whole.
Concerns about the "Bail-in" provision - “Bail -in” of the FRDI Bill had simply become too strong and, in the absence of any coherent defence from the Bill's backers in the government.
It had also become too dangerous for confidence in the banking system overall.
In particular, there were concerns that the bail-in provision would lead to depositors losing their money.
What is the way forward?
The government has not abandoned the notion of insolvency legislation for the financial sector altogether.
It will be important for work to start instantly on drafting a new Bill that serves the purposes that the FRDI Bill was supposed to.
Hopefully, the new Bill will have clearer provisions for depositor protection.
