The Financial Resolution and Deposit Insurance Bill (FRDI), 2017, which has got bank depositors worried about their savings, is expected to come up in Parliament’s winter session that starts Friday.
The FRDI Bill proposes to create a legal framework to help financial institutions such as banks, insurance companies, rural and cooperative banks in case of insolvency. What has got depositors worried is the controversial ‘bail-in’ provision which allows banks to use depositors’ money for resolution of bad loans due to corporate defaults to save banks and other financial institutions.
The joint committee of Parliament, which is studying the Bill, is likely to submit its report in the upcoming session. It is, however, not yet clear what view the committee will take. It is likely to come up for a discussion before it is taken up for passage by the House, sources in the Finance Ministry said.
The Bill has also been opposed by bank unions. All India Bank Employees Association said it was planning a strike if the government proceeded with the proposed legislation. The unions feel that a new authority proposed under the FRDI Bill will undermine the powers of Reserve Bank of India (RBI) as it gets sweeping powers to dismantle public sector financial institutions. RBI Governor Urjit Patel is likely to depose before the parliamentary committee on the issue soon.
As per Section 52 of the Bill in the event of collapse of a financial institution such as a bank, its creditors and depositors will have to absorb some of the losses. So far the government money is used to ‘bailout’ banks, now it will be ours, said Sheetal Sharma, a government officer, who fears her entire savings can be taken away without prior notice.
Depositors like Sheetal worry that their savings left in the bank could be deducted without any prior notice. Currently, deposits up to Rs 1 lakh are insured by the Deposit Insurance and Credit Guarantee Corporation, while the rest can be forfeited in case of a bank failure. The new Bill has not specified the amount of insured deposits yet but experts say it is not likely to be brought down.
Looking at the public reaction, Finance Minister Arun Jaitley was quick to clarify last week that depositors’ money would be fully protected in the event of a bank failure. Clarifying on the “rumours being spread about the Bill”, the Finance Ministry said, “the legal provisions in the Bill will ensure that the rights of the depositors are considered at an elevated level over unsecured creditors and dues owed to banks”. The government believes that the proposed law seeks to protect customers in times of financial distress.
The Bill also provides for the setting up of Financial Resolution Corporation (FRC), a rescue body which will decide if your money can be used in case the bank sinks. The bailouts have been facing criticism that they incentivise bank managements to take risks. The new Bill provides for minimising the costs and time involved in resolving distressed financial institutions.
The Bill was first mentioned in the FM’s 2016-17 Budget speech. Jaitley had said a systemic vacuum exists with regard to bankruptcy situations and that a comprehensive Code on Resolution of Financial Firms will be introduced in Parliament. In March 2016, a committee was set up under the chairmanship of Ajay Tyagi, then additional secretary with the Ministry of Finance, to draft the bill. Subsequently, the Financial Resolution and Deposit Insurance Bill, 2017, was drafted and introduced in Parliament in August this year.