On Financial Resolution and Deposit Insurance (FRDI) Bill : Orderly failure options will help Indian financial firms flourish 

News: Government is aiming to modify and re-introduce the Financial Resolution and Deposit Insurance (FRDI) Bill. 

Government is planning to modify and re-introduce the Financial Resolution and Deposit Insurance (FRDI) Bill. The bill puts in place a resolution mechanism to deal with the insolvency of firms in the financial sector. 

The bill was introduced earlier in 2016 but was withdrawn in 2018, due to controversy around  ‘bail-in’ provision. The provision distressed financial service providers with the option to restructure its debt internally. He was allowed to either write off its uninsured debt or convert deposits to other instruments such as equity. 

However, there are other concerns also associated with the bill.  

Scope of the bill: Pension funds and Housing Finance Companies (HFCs) are not clearly mentioned in the bill. So, whether FRDI provisions would be applicable to these sectors or not is ambiguous.  

Time bound payment to depositors: Financial Stability Board (FSB) advocates time-bound payments to insured depositors. This aspect should be addressed in the revised bill. 

Deposit Insurance system: International Association for Deposit Insurance (IADI) laid down ‘Core principles for effective deposit insurance systems’. It includes pay-outs be made to depositors within seven working days. FRDI bill had no mention of any such timeline, and only mentions about prompt pay-outs to depositors. The word prompt should be defined properly and not left to define per case basis on regulators.  

Coverage limit of insured deposits: Deposit insurance limit has been raised to Rs. 5 lakhs by an amendment to Deposit Insurance and Credit Guarantee Corporation Act. However, it is still abysmally low compared to the coverage limit of insured deposits of about ₹1.84 crore in the US and ₹1.5 crore in Australia. 

Immunity to officers: FRDI bill should also consider providing immunity to the directors and officers of the firm under resolution. In the absence of such immunity, challenges could arise in implementing resolution orders. 

Conflict of Interest: Operational freedom of the resolution body should be ensured. Dual role of resolution body in the resolution process as well as deposit insurance of insured service providers would result in conflicts of interest.  

Resolution: Government should prioritise creating the legal framework to encourage quick resolution of stress and insolvency. 

Bridge institutions: The bill should provide for reverse-transfer powers to ‘bridge institutions’, as available across the world. This would help in resolving even the loss-making part of the business. 

Source: This post is based on the article “Orderly failure options will help Indian financial firms flourish” published in Live Mint on 10th January 2022.    

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