To begin with, a lot of fire and storm has been kicked by the proposed Financial Resolution and Deposit Insurance (FRDI) Bill even before it has been passed by Parliament leave alone being assented by President. There is a widespread perception that if a bank fails everyone will have to sacrifice and this includes the depositors and the part of the money which is not insured. It is argued that this Bill can’t be avoided as it is part of the G20 (Group of 20 countries) FSB (Financial Stability Board) requirement. We all know that India is a member of the FSB and G20. As a member, India had accepted that it would work out a resolution package. The whole idea of this proposed Bill is that if at any point of time a bank fails then how can they be saved?
It also must be brought out here that some of the provisions of the proposed FRDI Bill is facing so much of vehement opposition because it provides for people’s money to be used to bail out banks that made bad lending decisions! Why should people suffer interminably because of wrong decisions made by bank lenders? Why should those bank lenders not be punished for their negligence or willful deceit?
Let me hasten to add here that the government’s statement reiterated its commitment to support banks. It said that, “The FRDI Bill does not propose in any way to limit the scope of powers for the government to extend financing and resolution support to banks, including public sector banks. Government’s implicit guarantee for public sector banks remains unaffected.” Banks are bound to feel happy.
Truth be told, the Bill empowers Resolution Corporation which has been envisaged as an oversight body to monitor the failure of financial resolutions and to limit the fallout of the failures of a systemically important financial institution on the overall sector – to cancel the liability of a failing bank or convert the nature of the liability. It is a significant omission that no specific deposit insurance amount is prescribed and this has been also opposed by many stakeholders. Presently, we see that all deposits up to Rs 1 lakh are protected under the Deposit Insurance and Credit Guarantee Corporation Act 1961 that is sought to be repealed by this proposed Bill. There are many other glaring loopholes.
To be sure, Mamta Pathania who is co-project Director at National Consumer Helpline and faculty member at the Indian Institute of Public Administration too voices her apprehensions by saying that, “The provisions of the Bill have been creating a lot of confusion in the minds of the people. Ultimately, bank deposits are considered the safest investment option by any investor.” What is equally important if not more is that even political parties like the Congress and various trade unions have also characterized the provision as anti-people and anti-poor and have also apprehended that ultimately it is small depositors who will have to pay the price for bad lending choices of banks, especially loans given to big corporates. This is really most reprehensible. Why should common man pay for misdeeds of big corporates?
One has to concede here with grace that the Finance Minister Arun Jaitley has himself acknowledged that “a lot of corrections could still take place”. No doubt, after the 2008 global financial crisis, governments all over the world have been forced to bring in laws to resolve failure of financial institutions and not to depend on public-funded bailouts. In India too, a new legal framework was felt as imperative to prevent such failures of financial institutions especially banks which explains why we see this proposed FRDI Bill being worked out by Government!
As it turned out, the Finance Ministry made it a point to highlight that, “The Insolvency and Bankruptcy Code, 2016 has introduced in the country a comprehensive resolution regime for mainly non-financial firms, but such a regime is not available in the country for financial firms.” It also reiterated that the FRDI Bill proposes to establish a “Resolution Corporation” (RC) and a comprehensive regime to enable timely and orderly resolution of a failing financial firm. It also sought to make it clear that, “It provides for detecting incipient insolvencies in financial firms by introducing a five-stage health classification of financial firms and stepping in to appropriately nurse a financial firm at the stage when its health becomes weak and it is classified in the category of material risk to viability.” The five-stage categories are primarily modelled on their risk of failures: low, moderate, material, imminent and critical risk to viability. If it is in the critical stage risk category then the RC has various ways in which it can resolve it which includes taking over the administration of the firm on the day on which is classified as critical.
This is to be done through a new entity termed as a Financial Resolution Corporation which is envisaged as an agency that will classify firms according to the risks they pose, carry out inspections and at a later stage take over control where necessary. This is what was recommended by the Financial Sector Legislative Reforms Commission headed by Justice BN Srikrishna. This is exactly what is being sought to be implemented now!
Sanjeev Sirohi, Advocate,
s/o Col BPS Sirohi,
A 82, Defence Enclave,
Sardhana Road, Kankerkhera,
Meerut – 250001, Uttar Pradesh.