Bank insolvency Bill has safeguards for depositors ABOUT THE BILL

Amount insured to be notified later, uninsured deposits get higher priority

The Financial Resolution and Deposit Insurance (FRDI) Bill dealing with the insolvency of financial services providers such as banks seeks to provide protection to bank deposits but the amount payable will be specified by the resolution corporation in consultation with the Reserve Bank of India (RBI).

At present, up to ~1 lakh of deposits per person are insured. The Bill also places claims of uninsured deposits higher in the priority list. In the case of a bail-in, only those liabilities can be cancelled that are agreed upon by depositors.

The FRDI Bill, 2017, presented in the Lok Sabha in August and referred to a joint committee of parliament, deals with the insolvency of financial service providers such as banks. It entails the creation of a resolution corporation with powers to monitor weak banks and ensure orderly liquidation. Uninsured depositors are now treated on a par with unsecured creditors and their claims rank lower than those of the government. The Bill proposes to place claims of uninsured depositors above those of unsecured creditors, the government, secured creditors for any amount unpaid following the enforcement of security interest; any remaining debts and dues, preference shareholders and equity shareholders. The Deposit Insurance and Credit Guarantee Corporation (DICGS) Act, 1961, insured deposits of up to ~1,500. This amount was subsequently increased on five occasions to ~1 lakh in 1993. This cover is enough to protect 92 per cent of accounts, according to the annual report of DICGC. The FRDI Bill continues to provide protection under the deposit insurance mechanism, though the exact amount will be specified by the resolution corporation in consultation with the RBI.

The Bill also allows bailins, which involve writing down liabilities or their conversion into equity to recapitalise banks. At present, there is no such provision in the law and if a bank fails it can either be merged with another bank or be liquidated. After the 2008 financial crisis, the Financial Stability Board, an international body comprising G20 countries, including India, recommended that members should allow resolution of firms by bail-in, according to think tank PRS.

The FRDI Bill has several safeguards if a bail-in is used. Bank liabilities can be cancelled only if depositors agree | | | | | | The Bill deals with the insolvency of financial services providers such as banks It entails the creation of a resolution corporation with the power to monitor weak banks and take steps to ensure orderly liquidation The Bill was presented in the Lok Sabha and was referred to a Joint Committee of Parliament At present, up to ~1 lakh of deposits of a person are insured in case of meltdown The Bill seeks to place claims of uninsured deposits higher on the priority list than under the existing structure The Bill allows bail-ins, which involve writing down liabilities or their conversion into equity to recapitalise banks beforehand. The resolution corporation may not include deposits among securities allowed under bail-ins. The Bill also states a bail-in shall not affect any deposit covered by deposit insurance. Further, a bail-in must be exercised according to the hierarchy of claims.

Again, no creditor, including depositors, in a bail-in must be left in a worse position than he would have been in the event of a bank’s liquidation. Aggrieved parties can approach the National Company Law Tribunal (NCLT) within 60 days of completion of the resolution. The tribunal will appoint an independent valuer within 15 days of receipt of the application and if a case is made out, it may direct the resolution corporation to pay higher compensation.