The Financial Resolution and Deposit Insurance (FRDI) Bill has been introduced in the Lok Sabha in August 2017 and is supposed to be discussed by a Joint Parliamentary Session in the winter session. The bill seeks to establish an all-encompassing Resolution Corporation (RC), which will have powers to acquire and transfer the assets or even liquidate any financial service provider in the case of its probable failure—be it a commercial, regional or cooperative bank, an insurance company, a payment system operator, a non-banking financial company (NBFC), a mutual or pension fund, or a securities firm. The FRDI Bill also seeks to repeal the Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961 and delegate to the RC, the powers of insuring deposits, collecting premium, and compensating depositors of an insured service provider in case of liquidation. According to the Financial Stability Report by the Reserve Bank of India, as of 31 March 2015, 92.3% of all accounts in India were fully protected which might be changed if the FRDI Bill has its way.
The FRDI Bill further empowers the Corporation to ‘bail-in’ the company. While a bail-out is the use of public funds to inject capital into an ailing company, a bail-in involves the use of depositors’ funds to achieve those ends. This can be done either by cancelling the bank’s liabilities, or converting them into other forms, such as equity. That means, to avoid a crisis, your fixed deposit of three years can be extended to 6 years, so that the bank has adequate funds to continue lending. Under the new law, there is a possibility of your deposit term being forcibly extended or you being given shares of the bank, which in any case would sell as peanuts under the financial stress. This means that the corporations who carelessly borrowed from banks as well as the banks who carelessly lent to the corporations would be completely exonerated from the crime; the small depositors of this country would be solely punished.
The impact of FRDI Bill, if it is made into a law, would be huge on co-operative banks. The co-operative banks were developed with an idea of catering marginalized people of this country. It often happens that the state government or NABARD injects capital into those banks or refinances them to keep them afloat. Under the new legal regime, the financially stressed bank would come under the control of the RC, which would decide whether to merge, close, liquidate or take any other measure.
The financial crisis of 2008 has been one of the most significant crises that capitalism has faced in last 100 years. It resulted in massive usage of taxpayers’ money to bailout banks. Apart from $700 billion that the US Treasury spent to bailout banks, another $16.8 trillion was committed by the US government to banks and other corporations. To protect big banks from such failure in future, the Financial Stability Board (FSB) was created. Apart from the US Treasury, US SEC, World Bank, IMF, OECD, the G20 countries are its members.
The concept of ‘bail-in’ made its appearance in a consultative paper of the FSB in July 2011. The proposal (echoed in a RBI report of May 2014) was ratified at the Brisbane G20 in November 2014. The exact wordings of the Key Attributes of Effective Resolution Regimes for Financial Institutions have been copied in the FRDI Bill. The governments instead of putting greater checks and controls on easy lending to corporations, are socializing the risk that are being taken by those very corporations.
The FRDI Bill, if passed, is not only harmful for depositors, but also dangerous for the banking sector in general. For example, if a bank declares that it cannot pay the depositor his due within the pre-decided timeframe, the depositors of other healthy banks may come under panic and withdraw their deposits from the banks. This ‘contagion effect’ can be very detrimental to the banking system and lead to its collapse. Hence, in the interest of depositors, bank employees and all other stakeholders, efforts are to be made by all sections of society to prevent this Bill from becoming a law.