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Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 is supposedly the new weapon in the government’s arsenal to ‘solve’ the bad loan crisis. This Bill’s stated objective is to form a Resolution Corporation that would ‘resolve’ a financial institution through means of a merger, amalgamation, liquidation (by order of NCLT) and bail-in and creation of bridge service provider. It also aims to classify certain financial institutions as Systemically Important Financial Institutions (SIFI) and repeal Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961.

According to the Governor of the Reserve Bank of India (RBI), the government and the RBI will take a multipronged approach in-order to fight the alarming volume of bad loans incurred by big corporate institutions. In the 2016-17 budget speech, the Minister of Finance, Arun Jaitley announced the introduction of a comprehensive code for the resolution of financial firms. The Insolvency and Bankruptcy Code (IBC), 2016 was passed, along with some amendments in the Banking Regulation Act as part of the multi-pronged approach. FRDI bill is the other crucial element of this plan. In the very next month of his budget speech, in March 2016, a committee was formed under the chairpersonship of Ajay Tyagi, Additional Secretary of the Department of Economic Affairs to draft the FRDI Bill.

FRDI Bill was drafted in a year and passed by the cabinet on June 4, 2017. The draft heavily borrows and adheres to the prescriptions of Financial Stability Board’s ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ released in October 2014. On August 10, 2017, it was introduced in the Lok Sabha and referred to a thirty member joint committee (20 Lok Sabha Members and 10 Rajya Sabha Members) on the very day. This joint committee has invited the views and opinions of all stakeholders and the public till September 29, 2017. The committee will be submitting its report to the Parliament on the first week of the next session. There is a high possibility that this Bill might get passed in the next session of the Parliament in November.

What is FRDI?

Resolution Corporation: The primary objective of the bill is the formation of a Resolution Corporation, which in its board would have ex-officio representatives from all financial sector regulators (the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India, and the Pension Fund Regulatory and Development Authority), the Ministry of Finance as well as independent members. All independent members will be appointed by the central government.

The Resolution Corporation (RC) would cover banks, insurance companies, Non-Banking Financial Companies (NBFC), holding companies, financial market infrastructures, systemically important financial institutions (SIFIs) and any other entity which may be notified by the central government for the purpose of resolution. If enacted the RC would subsume the role of DICGC and would also ensure deposit insurance (covered only for banks). This part of the Bill has been highly welcomed by the mainstream media. Currently, only a maximum of 1 lakh per person is insured under the DICGC, but FRDI does not specify or indicate an increase in the deposit insurance. Further, the deposit insurance scheme is only for deposits in banks and does not extend to other financial institutions.

Assessing Health and Resolution: The Resolution Corporation assumes a supervisory role and would assess the health of the financial institution and categorise them as one of the five categories of the “risks to viability framework,” which are (i) low, (ii) moderate, (iii) material, (iv) imminent, and (v) critical. For the first two categories, the Financial Resolution Deposit Insurance Corporation would act as a supervisory role and in consultation with the respective regulator. For those categorised as critical, the resolution corporation would take over the administration and only after classifying the firms as critical in writing. The RC would initiate a resolution process for critical sectors through various “tools” – a) the merger or sale of one institution to another, b) transfer of assets and liabilities to a bridge structure provider, c) bail-in, and d) liquidation.

Bail-in, Bridge Structure Providers and Run-offs: Lesser known and non-traditional, these tools are dubbed as novel methods in par with the international standards. While the Resolution Corporation provides deposit insurance, it also has provision to a bail-in amount above the limit covered by the deposit insurance. Bridge structure providers are temporary institutions that would take over the operations of a critical financial institution for a period of one year (maximum) by which time it would resolve or recommend liquidation. A run-off is a special tool for resolving insurance company, where the existing business is let to run off to its closure without taking new ones.

Need for Speed: The pride of the bill is its quick resolution plan. The resolution plan should be complete within a year of the institution being termed critical. An extension of one year may be given by the Corporation in writing. The time limit, however, will not apply for those under liquidation. The Resolution Corporation would come out with a specified time frame for various tools of resolution based on the specificity of the financial institution. But the general aim is to resolve the crisis as soon as possible with minimum capital infusement.

Why Should We Oppose FRDI:

So far the opposition to FRDI has been restricted to bank unions and employees and is also seen as a Bill that would impact the banking sector. But the Bill not only includes all banks (including State Bank of India), but also all financial institutions. The Bill, if enacted, would affect not just the survival of certain public sector banks, but also each citizen who holds an account in the banks. Hence, it is high time that the resistance to this bill has to be from the wider public.

  1. The Resolution Corporation will be the one to supervise the functioning of the banks and would relegate the Reserve Bank of India to fiscal policy implementation, currency and interest rates like central banks in many countries post 2008 recession.
  2. In case of liquidation of banks, only the amount protected by deposit insurance will be given to the depositor. The FRDI has not increased or redefined the amount of deposit insurance from existing 1 lakh per person.
  3. The provision to bail-in any amount of deposit beyond the insured amount is a blatant loot of the public money.
  4. The Resolution Corporation will have discretionary powers once an institution is deemed critical and can access any information, terminate, transfer, sell the institution at its discretion. (Chapter XI)
  5. No employee can question the decision of RC in case of termination or loss of job once the Corporation takes over the financial institution (Chapter XI, 58,3(c))
  6. The bill clearly states that cash-calls and haircuts will be used as means to mitigate losses (Chapter VIII 44, 2(a), (b)). Cash call is when a central counterparty asks its participants to contribute to raising funds and haircut is nothing but write off.

These are only a few points based on a very cursory glancing of the Bill. In the name of quick resolution of financial institutions, the government is orchestrating a very blatant and brutal robbery of public savings as handouts to corporate debt. When 88.4 percent of the bad loans is due to the corporate debts and top 12 accounts contribute to 25 percent of the bad loans, the government is reluctant to hold them accountable. When the government pushes the burden of bad loans to common citizens, it is reluctant to call wilful default criminal offence. Why should the people of this country be punished and the members of the board which sanctioned the loans and their subsequent restricting go scot free? When the government has money to spend on bullet trains, it can infuse capital into public sector banks as well.

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