Financial Resolution and Deposit Insurance

Law in India
December 7, 2017

The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill), introduced in
the Lok Sabha on August 11, 2017, is under consideration of the Joint Committee of
the Parliament. The Joint Committee is consulting all the stakeholders on the
provisions of the FRDI Bill.

This Bill is similar to the Insolvency and Bankruptcy Code, 2016, which was enacted
last year in May. Both of these are about issues that can arise when companies go
bankrupt or insolvent, except that this Bill deals only with the companies that are in
the financial sector. The insolvency code Act deals with companies in all other sectors.
The FRDI will provide a comprehensive resolution framework to deal with
bankruptcy situations in financial sector entities such as banks and insurance
companies.

Presently, each depositor of banks can be only protected up to a limit of Rs. 1 lakh by
the guarantee of the Deposit Insurance and Credit Guarantee Corporation (DICGC).
Remaining deposits (i.e. beyond Rs. 1 lakh of deposits in a bank) do not have any
deposit protection guarantee and are treated, at par with claims of unsecured
creditors as of now.

Besides providing similar protection / guarantee of Rs. 1 lakh to depositors, as it exists

today, the rights of uninsured depositors are being placed at an elevated status in the
FRDI Bill compared to the existing legal arrangements over the unsecured creditors
and even Government dues.

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
Shares
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.

FRDI Bill 2017 seeks to protect customers of financial service providers in times of
financial distress.

It also aims to inculcate discipline among financial service providers in the event of
financial crises, by limiting the use of public money to bail out distressed entities.

The Bill would help in maintaining financial stability in the economy by ensuring
adequate preventive measures, while at the same time providing the necessary
instruments for dealing with crisis events.

The Bill aims to strengthen and streamline the current framework of deposit
insurance for the benefit of retail depositors.

Further, it seeks to decrease the time and costs involved in resolving distressed
financial entities.

Once enacted, a resolution corporation will be setup to strengthen the stability and
resilience of the entities in the financial sector.

The FRDI Bill is far more depositor friendly than many other jurisdictions, which
provide for statutory bail-in, where consent of creditors / depositors is not required
for bail-in.

The FRDI Bill does not propose in any way to limit the scope of powers for the
Government to extend financing and resolution support to banks, including public
sector banks. Government’s implicit guarantee for public sector banks remains
unaffected.
Indian Banks have adequate capital and are also under prudent regulation and
supervision to ensure safety and soundness, as well as systemic stability. The existing
laws ensure the integrity, security and safety of the banking system.

In India, all possible steps and policy measures are taken to prevent the failure of
banks and protection of interests of depositors (e.g. issue of directions / prompt
corrective action measures, capital adequacy and prudential norms).

The FRDI Bill will strengthen the system by adding a comprehensive resolution
regime that will help ensure that, in the rare event of failure of a financial service
provider, there is a system of quick, orderly and efficient resolution in favour of
depositors.

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