FRDI Bill Clauses Aimed At Protecting Depositors’ Interests, Finance Ministry Says

The Financial Resolution and Depositor Insurance Bill is more “depositor friendly” as it provides additional protection in a more transparent manner compared to existing provisions, the finance ministry said today.

“The provisions contained in the FRDI Bill, as introduced in the Parliament, do not modify present protections to the depositors adversely at all,” said a press release issued by the Ministry of Finance.

The Bill was introduced in the Lok Sabha on Aug. 10, this year, and is presently being considered by the 30-member Joint Committee of the Parliament.

Currently, under the Deposit Insurance Corporation Act, a maximum of Rs 1 lakh is insured for each depositor. In a hypothetical scenario, if a bank is liquidated, principal and interest up to Rs 1 lakh is insured. The FRDI Bill introduces a provision for a ‘bail-in', but specifically excludes insured deposits. The concept of a ‘bail-in' is one under which creditors and depositors absorb some of the losses when a financial institution fails.

In its current form, the provisions of the Bill suggest that deposits to a certain extent would continue to be insured just like in the current regime. It leaves the decision on the amount to be insured in the hands of the regulator concerned.

As per the current provisions in the FRDI Bill, if a bank goes into liquidation, uninsured depositors will get higher priority than unsecured creditors and government claims, which is not the case currently, Suyash Rai, a senior consultant at National Institute of Public Finance and Policy, told BloombergQuint.

In the past, where banks have found themselves in trouble, the Reserve Bank of India has often restricted deposit withdrawal for a period of time, but eventually merged the weak bank with a stronger one. Rarely have depositors needed to resort to deposit insurance.

Under the new regime, the Resolution Corporation, which becomes the overseeing authority in the case of stressed financial institutions, may not have that kind of 'moral suasion' powers and may resort to liquidation.

The government, in its press release today, said the FRDI Bill does not limit the powers of the government to extend financing and resolution support to banks, including public sector lenders. “Government's implicit guarantee for public sector banks remains unaffected,” it said.

The FRDI Bill will strengthen the system by adding a comprehensive resolution regime that will help ensure a quick, orderly and efficient resolution in favour of depositors, if a financial institution fails, the government said.

Rai from NIPFP agrees. If this Bill gets enacted, it will start the process of building an effective resolution system, he said.

However, CH Venkatachalam, general secretary of All India Bank Employees' Association told BloombergQuint that the FRDI Bill is unwarranted as the Banking Regulation Act does not allow the liquidation of banks. According to the Act, the government cannot use taxpayers' money to bail out banks and such institutions should be merged with other banks, he added.

The AIBEA has demanded the government scrap the Bill, Venkatachalam said.