Withdrawal of FDRI Bill wise, but certain questions remain

Framework for resolving bankruptcies among financial entities needed

In just under 12 months since its introduction in Parliament, the Centre has quietly withdrawn the Financial Resolution and Deposit Insurance Bill, 2017. The decision to seek the Lok Sabha’s approval to withdraw the legislation this week is a clear acknowledgement by the government that it had underestimated the extent and intensity of public opposition to the proposed law. One provision in the Bill had, in particular, generated the greatest debate and attracted the fiercest criticism and ultimately proved to be its very undoing: the “bail-in” clause. The government did make strenuous efforts to reassure the public, explaining the rationale for the Bill as well as the built-in “safeguards” relating to the bail-in provision. However, its exertions made little headway.

However, the need for a specialised dispensation to cope with large financial corporations on the verge of going bust cannot be overstated, especially given the contagion risk that a bank failure can pose to overall financial stability. The withdrawal of the FRDI Bill should therefore be used as an opportunity by policymakers to reappraise the existing framework for resolving bankruptcy scenarios among financial entities. While such a review ought to include an evaluation of the progress made by the Insolvency and Bankruptcy Code in addressing the crucial issue of debt resolution in the banking sector, it must also look at ways to strengthen the Deposit Insurance and Credit Guarantee Corporation.