FRDI BILL: REINVENTING THE NARRATIVE
In its new avatar, the narrative has to focus on the need for speedy resolution of distressed financial service providers
The vacuum in the dispute resolution regulatory environment is being felt the most as policymakers and regulators grapple with the fallout of the meltdown in the infrastructure lending major IL&FS, cases of business failure in some NBFCS, and the stress in the cooperative banking system. This has forced the government to take a fresh look at the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017. The Bill was shelved in August last year following apprehensions around the ‘bail-in’ clause by depositors and stakeholders of a failed financial service provider.
“The FRDI Bill, 2017, was not marketed well. The presence of the Act would have helped find faster resolution in the IL&FS Financial Services case,” says Abizer Diwanji, head, financial services, restructuring & turnaround services, EY. The Bill proposed setting up of a state-owned Resolution Corporation (RC) to monitor the financial health of financial service providers on an ongoing basis. It was required to classify stressed out firms in five categories depending on the level of financial stress -- low, moderate, material, imminent, and critical. The RC would have the mandate to undertake quick corrective measures for firms in the ‘imminent’ and ‘critical’ brackets. The tools at the corporation’s disposal ranged from enabling the transfer of assets and liabilities to a financial firm, bail-in by depositors or stakeholders, and liquidation of the firm. However, it was the ‘bail-in’ clause that attracted criticism of depositors and public at large, leading to the shelving of the Bill in August last year.
The stress in the financial services sector over the last one year has only accentuated the need a comprehensive code for resolution of financial firms — from early recognition of distress to an orderly resolution. According to Suharsh Sinha, partner at law firm, AZB & Partners, the presence of the FRDI Act would have helped in timely detection of incipient stress, prompt corrective action, and containing contagion in the system. “While the law may not have prevented defaults attributable to fraud or genuine business failure, it would have inculcated better discipline among large NBFCS and housing finance companies like IL&FS and DHFL,” says Debanshu Mukherjee, Lead (Corporate Law and Financial Regulation) at Vidhi Centre for Legal Policy.
Most legal experts believe had the FRDI Bill been enacted alongside the Insolvency and Bankruptcy Code, it would have helped the government deal with the crisis better. The Bill had proposed a structured approach for monitoring the viability of large financial institutions and resolving failing ones swiftly through a powerful body with sweeping resolution powers, experts add.
Some policy watchers say there was resistance to the Bill from certain sections of the regulator and regulated ecosystem when it was first mooted in 2017. Some healthy tension is expected between the fiduciary regulator and the newly-mooted Resolution Corporation when it comes into play, point out experts. Sinha is of the view that a specialised agency, such as the Resolution Corporation, would have significantly enhanced the supervisory and oversight infrastructure of the government which would have helped in addressing governance issues.
As for the contentious issue of ‘bailin’ by depositors or stakeholders of a failed financial institution, most experts feel the issue of deposit insurance was not well understood by the public at large.
“The FRDI Bill had contemplated renewed deposit insurance for the financial institutions,” points out Dhananjay Kumar, partner, Cyril Amarchand Mangaldas. However, he hastens to add that one cannot have 100 per cent deposit insurance as the costs will be too high. “The answer is in closer scrutiny and regular assessment of risk,” he says.
Mukherjee agrees that the upward revision of the deposit insurance limit is long overdue, but he points out that deposit insurance will not be good enough, especially during a crisis. “One needs to make sure that when a bank fails, the insured amount is paid back as soon as possible for that insurance to have any meaning and disciplining force,” he adds.
However, to tackle business failure issues around cooperative banks, the FRDI Bill may not be of too much help, say experts. They recommend dismantling the duel system of regulation that these banks are subject to. “The central government should consider initiating a consultation with the state governments and propose a Constitutional amendment for enabling the RBI to monitor and supervise co-operative banks more intensively,” suggests Mukherjee.
While most experts highlight the need more institutional capacity and operational independence for regulators to improve oversight, they caution that the regulatory response should be tailored not have a chilling effect on the growth of the financial services sector.