The Financial Resolution and Deposit Insurance (FRDI) Bill 2017 which was tabled in Parliament in August 2017 has been making news due to its controversial “bail-in” clauses which has been projected as one of the resolution tools in the event a financial firm is to be sustained by resolution. The deposits with banks are insured up to Rs. 1 lakh and under the FRDI law, the Resolution Corporation is empowered to increase this deposit insurance amount.
Media has expressed certain misgivings in context of the ‘bail-in’ provisions of the bill stating a probable risk of public sector banks being required to avail themselves of the bail-in clause. Bail-out is the use of public funds to inject capital into an ailing company and bail-in involves use of depositors’ funds to achieve those ends; which can be done by cancelling the bank’s liabilities or converting them into other forms such as equity.
The main provisions of the bill include setting up a Resolution Corporation which would replace the current Deposit Insurance and Credit Guarantee Corporation and will monitor the financial firms, anticipate their risk of failure, take corrective action and resolve them in case of failure. This corporation will also provide deposit insurance up to a certain limit which is yet to be specified, in case of a bank failure. The Corporation as per the bill is also to be empowered to bail-in the company.
This has raised concern among depositors and has sparked worries of losing their hard-earned money deposited with banks. The government has specified that this clause will not be applicable in case of PSBs as the government is always ready to handle their capital stress and needs while the private sector will only be availing it as a last resort. This may be a bit relieving at the moment and agreeable that the bill isn’t a draconian piece of legislation, only if the bill doesn’t get passed with the contentious proposed provisions. We have to wait for the entire provisions to be laid in the Rajya Sabha before depicting any worry.