Amid concerns over bail-in clause, govt withdraws FRDI bill from LS

NEW DELHI: The Narendra Modi government Tuesday withdrew the controversial Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, a year after it was introduced in the Lok Sabha.

The bill aimed to set up a new regulator to oversee banks and insurance companies, anticipate the risk of their failure, take corrective action, and offer avenues of resolution if the firms did fail.

It ran into trouble on two counts: one, the fact that it seemed to infringe on the authority of existing financial sector regulators such as the Reserve Bank of India; and two, because of its controversial bail-in clause that allowed the use of internal resources for the revival of sick financial firms.

Clause 52 of the bill made it mandatory for financial firms to hold liabilities such as deposits, preferential shares, and bonds that could be used for this if the bail-in clause was invoked. This led to apprehensions that bank deposits of customers would be used for the purpose. However, bank deposits were safe under the bill, until and unless the Resolution Corporation specified that they were a liability.

“We understand there were stakeholder concerns about the Bill. We have withdrawn the Bill to revisit the provisions where concerns were raised and will reintroduce it at a later date,” said a top functionary in the finance ministry who spoke on the condition of anonymity.

In August 2017, the bill was referred to a joint panel comprising members of both the Houses. It got an extension until the end of the monsoon session to submit its report.

The government tried its best to assuage the apprehensions of common people and investors. Then finance minister Arun Jaitley told the Rajya Sabha in January that the Centre is open to suggestions for a hike in the ~1 lakh limit on the guarantee of deposits in case a bank failed. The bill basically set the same limit as the previous deposit insurance law did, Rs 1 lakh. “At the moment, security is up to ~1 lakh. But provisions of the bill give a flexibility and the government’s intention is also to raise this amount,” Jaitley told the Upper House. The limit of Rs 1 lakh was set in 1993.

“We are waiting for the recommendations of the Standing Committee. I am open to consider the suggestions in this regard,” Jaitley said.

“The Bill was withdrawn because of misunderstanding on how public funds deposited with banks will be used for bail out of a distressed financial institution. The government has denied using public funds for bail-out but lack of clarity and public uproar against the clause killed the legislation. A much simpler format of managing distressed banks with the help of equity-holder funds and assets for turnaround is required,” said Kuntal Sur, partner and leader, financial services risk and regulation at PWC India.

THE CONTROVERSIAL BAILIN CLAUSE SOUGHT TO ALLOW THE USE OF INTERNAL RESOURCES FOR THE REVIVAL OF SICK FINANCIAL FIRMS