1. FRDI Bill: What is a bail-in, and are your bank deposits actually at risk

FRDI Bill: What is a bail-in, and are your bank deposits actually at risk

Since the Financial Resolution and Deposit Insurance Bill, 2017, popularly referred to as the FRDI Bill, was tabled in Parliament, it has given worries to the depositors.

By: | Updated: December 11, 2017 10:48 AM
GST data, CBEC orders taxmen to share information, Central Board of Excise and Customs, pre GST revenue The bill was first brought to attention by Union Finance Minister Arun Jaitley

 in his 2016-17 budget speech.  (Image: Reuters)

Since the Financial Resolution and Deposit Insurance Bill, 2017, popularly referred to as the FRDI Bill, was tabled in Parliament, it has given worries to the depositors.  In response to the bill, an online petition against the Bill — “Do not use innocent depositors’ money to bail in mismanaged banks #NoBailIn” — had attracted almost 90,000 signatures by Saturday night. The government has been forced to issue a statement saying the law is, in fact, aimed at protecting the interests of depositors in a “more transparent manner”. A report in the Indian Express lists in detail the various aspects of the bill.

What is the FRDI Bill about?

For those who still don’t know what is FRDI bill, here are 10 important points:

  1. The bill was first brought to attention by Union Finance Minister Arun Jaitley in his 2016-17 budget speech. The senior BJP leader had said that a systemic vacuum exists with regard to bankruptcy situations in financial firms and that a comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17.
  2. In March 2016, a committee was set up under the chairmanship of Ajay Tyagi, additional secretary, Department of Economic Affairs, Ministry of Finance, to draft and submit the Bill.
  3. The draft of Financial Resolution and Deposit Insurance Bill 2017 was drawn up based on the recommendations of this committee.
  4. The finance ministry, then, gave time until 31st October 2016 to given comments. After considering the suggestions, the Union Cabinet approved to introduction of FRDI Bill 2017 in the Parliament.
  5. The Finance Ministry believes that the bill seeks to protect customers of financial service providers in times of financial distress.
  6. The bill will also help to encourage discipline among the financial service providers by putting a limit on the use of public money to bail out distressed entities.
  7. It seeks to decrease the time and costs involved in resolving distressed financial entities.
  8. In order to strengthen the stability and resilience of the entities in the financial sector, a resolution corporation will be set up after the bill is enacted.
  9. However, the FRDI Bill has received its share of criticism from various stakeholders for some of its controversial provisions including a ‘bail-in’ clause which suggests that depositor money could be used by failing financial institutions to stay afloat.
  10. Another controversial inclusion is that the Resolution Corporation (rescue body) which is proposed under the Bill, can use your money in case the bank sinks. The bill empowers the rescue body to decide the amount insured for each depositor.

“Bail-in” provision

Everyone has long been used to the word “bailout”, where governments step in to protect the interests of savers or depositors — like in the UK when there was a run on the deposits of banks such as Northern Rock, Llyods Bank, or RBS. There were cases in the US and other parts of Europe, too. The fact that huge public funds were used for such support, and criticism that bailouts incentivised bank managements to take risky bets — called “moral hazard” by economists — led governments to seek other solutions. Regulators put in place laws and rules to discourage or prevent such bailouts with new resolution regimes. Losses of these financial firms had to be borne by shareholders and creditors rather than taxpayers. One of the tools for such resolution is “bail-in”. It allows resolution agencies to override the rights of the shareholders of the firm — this could mean writing down of a company’s equity and debt to absorb losses, or converting debt into equity. This could also mean overriding requirements such as approvals by shareholders and disposing of the firms’s assets. The G20 at its Cannes Summit in 2011 endorsed some of the key attributes of such resolution, including transfer or sale of assets and liabilities, and legal rights and obligations including deposits liabilities and ownership in shares, to a third party without any requirement for consent. In other words, deposit holders do not have any superior claims.

What is the rationale behind this bail-in provision?

The principal aim, of course, is to minimise the cost of any such failures of financial firms to taxpayers. The other objective, as the EU’s Bank Recovery and Resolution Directive, 2014, indicates, is that shareholders of banks and creditors must also pay their share of costs, rather than governments or taxpayers absorbing all losses. The Bank of England has been pushing banks in the UK to set aside more funds to cover for potential failures. The aim, the UK central bank says, is to ensure banks no longer remain “too big to fail”, and to make sure that the risks that banks take are properly priced by investors who know they will suffer if things go wrong.

What is the worry that depositors and others have regarding the provision in the proposed Indian law?

India’s financial sector is bank-dominated, and bank deposits make up the dominant share of financial savings. The fear is Indian policymakers may want to nudge savers on the same path as in many other parts of the world — to ultimately lower risks and the potential burden on taxpayers, although there is no explicit mention of this in the proposed law. In India, deposits in banks are insured for a maximum of Rs 1 lakh by the Deposit Insurance and Credit Guarantee Corporation, which is now an arm of the RBI. There are concerns that the Bill may not clearly lay down the quantum of protection for deposits, or classify deposits separately.

Government’s response

Finance Minister Arun Jaitley is in favour of the proposed FRDI Bill for protecting the rights of depositors. Touted as the bill to protect the existing interest of institutions and depositors, Finance Minister Arun Jaitley has maintained that if this law is not passed, then the present system, where there is inadequate protection for depositors will continue. The Financial Resolution and Deposit Insurance Bill, 2017 is pending before the Standing Committee. Jaitley said that he is sure about the advantage of the proposed bill. “Adequate protection is needed for depositors. Now, what should be that larger protection? I am sure the parliament standing committee will consider this and give suggestions”, said FM Jaitley.

“There is talk on social media with regard to legislation being considered by Parliament standing committee. It’s a law which deals with financial stress in case any institution feel stress. This was one area where there was no law. So obviously this gap had to be filled up”, Jaitley added. On Wednesday, Arun Jaitley said that the proposed FRDI Bill will protect the depositors’ rights, denying reports to the contrary. “The objective of the government is to fully protect the interest of the financial institutions and depositors,” added Jaitley.

Meanwhile, Economic Affairs Secretary S C Garg too had said that FRDI Bill proposes to protect existing rights of the depositors. “There is no dilution thereof. Instead, it enhances present protections in certain ways. Principal guarantee for PSU Banks’ depositors come from government ownership which also remains completely unaffected,” Garg said. The government tabled the Financial Resolution and Deposit Insurance Bill, 2017 in August in the Lok Sabha, which was referred to a Joint Committee of Parliament. The bill seeks to deal with the insolvency of financial service providers. In a statement released to the press, the Finance Ministry has clarified the existing provisions of deposit protection guarantee will be maintained in the proposed FRDI Bill as well.

The FRDI bill provides for the establishment of a resolution corporation with powers relating to the transfer of assets to a healthy financial firm, merger or amalgamation, liquidation to be initiated by an order of the National Company Law Tribunal. It can also designate certain financial providers as systematically important financial institutions, the failure of which may disrupt the entire financial system, said the ‘Statement of Objects and Reasons’ of the bill.

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  1. G
    Gunesh Deosthali
    Jan 1, 2018 at 10:54 am
    Don’t worry, your fixed deposits are safe and banks cannot use them without your consent Your deposits will be insured, just as they are today and there is an additional protection for depositors because the bail-in can be invoked, and your deposits be lost, only if you have given your consent to the bank when you signed the deposit forms. : hindustantimes /analysis/frdi-bill-your-deposits-are-safe-and-banks-cannot-use-them-without-your-consent/story-TBf5QuI4eczXx8E2EhwhKN New FRDI Bill won't take away your money in the bank: Finance ministry Read more at: economictimes diatimes /articleshow/61963327.cms?utm_source contentofinterest utm_medium text utm_campaign cppst
    1. L
      LGS MONY
      Dec 29, 2017 at 7:30 pm
      Why can't the deposits of individuals irrespective of the amount be insured? Even the insurance premium can be collected from the depositors themselves. If the proposed resolution corporation charges 1 deposit insurance premium per annum it will have a corpus of Rs.two lakh crores in 3-4 years which should be sufficient to resolve any crisis without touching taxpayers money. It is morally incorrect for banks/GOI to use deposits to save the banks and the defaulting borrowers.
      1. P
        Dec 21, 2017 at 12:57 pm
        1. R
          Rajarshi Dasgupta
          Dec 20, 2017 at 11:15 am
          I'm confused. How can putting bank fixed deposits at risk mean looking after the interest of depositors.
          1. S
            Dec 15, 2017 at 8:22 pm
            It is OK. But the Depositors who are scared by the social media may find ways to get out of the clutches of the banks. The situation may be exploited by the private Financial Ins iutions and Mutual Funds to lure the unwary people to get a large chunk of the Country"s money. Government may take appropriate steps to protect the people from such financial ins itutions and at the same time they should remove the controversial clauses that empowers banks to deal with the deposits suo motu in case of necessity to clear the fear of the people. Otherwise people will begin to stack their savings at home and shy away from banks.
            1. M
              Mantu Debnath
              Dec 12, 2017 at 10:38 am
              Now I ask to Government what is the difference between cheat fund (such as Saradha, Rose vally, Sahara, Alchemist etc.) and Bank I think there is no difference between above mentioned two. if I say it wrong kindly reply me to change my opinion.
              1. S
                swaminathan s
                Dec 12, 2017 at 8:31 am
                iF WHAT fm SAYS IS TRUE LET HIM EXPLICITLY SAY IN THE BILL THAT GOVERNMENT OF INDIA GUARANTEES REPAYMENT OF MONEY DEPOSITED BY GENERAL PUBLIC INPUBLIC SECTOR BANKS NOTWITHSTANDING WHATEVER IS STATED IN THE PROPOSED BILL fm WILL BUNGLE ONCE THE BILL IS PASSED LIKE THEIR BUNGLING IN aadhaar ISSUE. tHEY STATE SOMETHING BEFORE SUPREME COURT AND ISSUES CONTRADICTORY PRESS NOTE THEREAFTER lLinking. aadhar to bank accounts is extended to 31.3.2018 but in fine print they say only those who have not applied and got aadhaar card sofar. A bold and effective opposition is a must to protect the innocent voters in this country
                1. K
                  Dec 11, 2017 at 11:38 pm
                  Please get rid of the jargon if bail-in bill passes as of now.. the maximum amount guaranteed to return is only one lakh per bank per customer.. any thing beyond can be used to cover bank losses .. correct me if I am wrong..
                  1. Vijayalakshmi Ramasubramanian
                    Dec 11, 2017 at 8:54 pm
                    Please explain in simple words whether a depositor would be able to withdraw his money in savings or deposits with the bank at his will without any hassles?
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