OPINION | FRDI Bill: New version must ensure adequate protection of bank deposits

Modi government may revive the FRDI Bill as India’s faith in banks is shaken by the PMC Bank crisis.

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The Modi government is in the process of reworking the Financial Resolution and Deposit Insurance (FRDI) Bill, suggest news reports. The legislation was introduced in 2017 by the then finance minister Arun Jaitley and was withdrawn a year later after concerns were raised about the bail-in clause, under which depositors of a failing financial institution would bear part of the resolution cost. The Bill was introduced because the Insolvency and Bankruptcy Code, 2016 did not cover deposit-taking financial institutions.

The current bank deposit insurance scheme covers all types of bank deposits — savings, fixed and recurring — up to Rs 1 lakh. The deposits are insured by Deposit Insurance and Credit Guarantee Corporation, an arm of the Reserve Bank. The corporation charges a nominal premium on banks. A major drawback of the current system is that the guaranteed amount will be released only after the bank gets closed. In India closing any firm is a long-drawn process and this means investors’ funds are locked for a long period. Another problem is that deposits held at different branches of the failed bank are clubbed for the insurance coverage.

Also read: PMC Bank crisis: Setback for depositors; SC refuses to entertain plea on lifting withdrawal limit

The FRDI Bill was conceived to provide a framework for the resolution of failing financial institutions across sectors. The bill sought to establish a Resolution Corporation that will have powers to acquire and transfer assets or liquidate a financial service firm in case of failure. The corporation was to cover commercial, regional or cooperative banks, insurance companies, NBFCs, securities firms, mutual funds, and pension funds. The Bill also sought to repeal the Deposit Insurance and Credit Guarantee Corporation Act of 1961, giving the Resolution Corporation powers to insure deposits and compensate depositors in case of institutional failures.

The move to revive the FRDI Bill is seen as a reaction to the crisis in Punjab & Maharashtra Co-operative (PMC) that exposed the weakness of the laws that protect India’s bank customers. The Reserve Bank and the government cannot ignore the situation as many more banks and cooperatives could go under because of a combination of economic slowdown and bad lending practices. The need for protection is dire in the case of bank deposits as most of the investors belong to the lower strata of the society or retired people who cannot risk their life’s savings.

There is a reason for their faith in bank deposits. There is no instance of India’s scheduled commercial banks going bankrupt since 1990s. The government has been alert to bankruptcies in the sector and always ensured that weak banks were acquired by stronger ones before they collapsed. So there is immense faith in the banking system despite the failure of some cooperative banks.

News reports suggest that the government may raise the deposit insurance scheme to cover deposits up to Rs 3 lakh. Even this amount is grossly inadequate. A committee set up by the RBI in 2011 had recommended a five-fold increase in deposit cover to Rs 5 lakh. A large number of depositors could be reduced to penury in case of a bank failure. This was the reason why the bail-in clause in the FRDI Bill sparked widespread protests. The government must ensure that the bank deposits get adequate coverage in the reworked FRDI legislation.

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