The proposed Financial Resolution and Deposit Insurance (FRDI) Bill has generated a lot of noise with bankers threatening to go on strike if the Center proceeds on the proposed legislation. Presently under consideration of the Joint Committee of Parliament, the FRDI bill aims to create a framework for overseeing financial institutions such as banks, insurance companies, non-banking financial services (NBFC) companies and stock exchanges in case of insolvency. The bill was first introduced in the Lok Sabha in August this year.
Here's what Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI said about the FRDI Bill in a SBI Ecowrap report:
The main cause of concern and confusion among depositors is the bail-in clause, where the financial firms/companies issue securities in lieu of the money deposited. It means, in case the firms financial situation deteriorates, deposits could be converted into securities such as shares of the bank.
This proposed bail-in clause has raised a lot of concern among depositors who are worried that they may lose their deposits with banks.
Currently, DICGC provides deposit insurance of up to 1 lakh and the rest of amount is forfeited in the rare event of a bank failure. However, the truth is that the risk is much less in the proposed bill, the report said.
Bail-in strategy would help to mitigate the systemic risks associated with disorderly liquidations, reduce deleveraging pressures, and preserve asset values that might otherwise be lost in a liquidation.
In India, 67 per cent of term deposit accounts are of less than Rs 1 lakh. Thus, even if any banks ever hypothetically fails, then it would not affect small depositors at all, as it is covered through insurance.
It has also been proposed in the bill that financial firms in India will be classified under five categories based on their risk profiles. This will incentivise the higher risk banks to improve their risk profiles, SBI Ecowrap said.
The FRDI bill will be a win-win for all with all such suggested changes to make it more depositor-friendly, the report said. Currently in India, there is no specialised law for the resolution of financial firms and in this context, the FRDI Bill, 2017 is a welcome step, said the SBI report.