WHAT IS FINANCIAL RESOLUTION AND DEPOSIT INSURANCE BILL (FRDI) BILL ?

The Financial Resolution and Deposit Insurance bill ( FRDI)

This new Financial Resolution Bill will seek to regulate financial service providers including banks (not cooperative banks), insurance companies, financial market infrastructure, payment systems, non-banking finance companies so as to comply with the emerging international norms for establishing effective resolution regime for financial sector.

The proposed Financial Resolution and Deposit Insurance Bill 2017 together with the Insolvency and Bankruptcy Code 2016 is expected to provide a comprehensive resolution mechanism for the Indian economy with the objective of protecting consumers of specific service providers and public funds, official sources said.

The Financial Resolution Bill will also pave the way for creation of Resolution Corporation and confer on it certain new methods of resolution such as bail-in and bridge service provider.

Also, this Bill provides for designation of certain financial service providers as Systemically Important Financial Institutions.

FRDI bill :

False propaganda:

"This bill seems to take away the rights you never had in the first place.

Reality:

In theory it actually strengthens the consumer. In practice, consumers should realise this will reduce the political pressure on RBI which instead of merging the failing banks will force them to restructure their holdings. Thus consumers are more likely to have their deposits in excess of 1 lakhs converted into longer term debt or equity"

Highlights of the Bill

• The Bill establishes a Resolution Corporation to monitor financial firms, anticipate risk of failure, take corrective action, and resolve them in case of such failure. The Corporation will also provide deposit insurance up to a certain limit, in case of bank failure.

• The Resolution Corporation or the appropriate financial sector regulator may classify financial firms under five categories, based on their risk of failure. These categories in the order of increasing risk are: (i) low, (ii) moderate, (iii) material, (iv) imminent, and (v) critical.

• The Resolution Corporation will take over the management of a financial firm once it is classified as ‘critical’. It will resolve the firm within one year (may be extended by another year).

• Resolution may be undertaken using methods including: (i) merger or acquisition, (ii) transferring the assets, liabilities and management to a temporary firm, or (iii) liquidation. If resolution is not completed within a maximum period of two years, the firm will be liquidated. The Bill also specifies the order of distributing liquidation proceeds.

Key Issues and Analysis

• The Resolution Corporation will exercise certain powers including: (i) classification of firms based on risk, and (ii) directing the management of a firm to return their performance based incentive. However, the Bill does not specify a review or appeal mechanism for aggrieved persons to challenge the decision of the Resolution Corporation.

• A financial firm will have to be resolved within two years of being classified as ‘critical’. However, the point at which the resolution process ends is not specified in the Bill.

• Under the Bill, the Resolution Corporation will take over a firm classified as ‘critical’. However, it may choose to resolve the firm. It is unclear why the Corporation is given a choice to undertake resolution.

• The Bill specifies that the Corporation will take over the administration of a firm, and exercise the powers of the board of directors, as soon as the firm is classified as ‘critical’. However, it also allows the Corporation to supersede the board of a firm if it is classified as ‘critical’. The provision allowing the Corporation to supersede the board of a firm classified as ‘critical’ may be redundant.

• The Bill requires financial firms to pay fees to the Resolution Corporation, including those specified in Clause 33. However, Clause 33 does not specify fees that these firms will be required to pay.