WHAT IS FRDI BILL?

FRDI BILL AND HOW WILL IT AFFECT YOUR BANK DEPOSITS?

The Financial Resolution and Deposit Insurance Bill, 2017 (FDRI Bill), was introduced in the Lok Sabha on 19th August 2017 but withdrawn exactly a year later in August 2018 after a hue and cry across the country because people think that their deposits are no longer safe.

Why did they think that? Because that Bill had a strange provision which is called the bail-in clause

What is Bail-in? Bail-in is the opposite of Bailout.

What does Bail-in do? It converts the deposits of larger depositors above a certain threshold level, the threshold being the level at which the deposits are being insured by the deposit insurance guarantee corporations anything above that deemed fit will be forcibly converted into equity and use to bail out the Bank and recapitalize it.

Why People Panic? Because bad loans of banks have been increasing steadily, in fact, the bad loans of Bank have reached 10 lakh crores and the government of India is tolling out large amounts of money to recapitalize the bank especially public sector banks as they are owned by the Government and so the government has to take responsibility for them.

Internationally several nations got together India as part of a treaty, a multilateral treaty where they've committed to ensure that bailouts will not be done by governments as was done in 2008 in the US but would have to be done by depositors of banks but in the Indian situation that was vastly unfair because banks are owned by the government and we trust that our deposits are safe in public sector banks in fact, the entire Indian savings situation is different. As you know we are big savers we don't have Social Security so many of us who are taxpayers have to depend on the money that we've saved away all our lives after paying our full taxes. We trust bank deposits more than anything else now imagine a situation where these bank deposits are unsafe so there was a hue and cry the government withdrew the bill.

What is the current news?

The news this time is that probably in the first session of Parliament the bill is likely to be reintroduced. A briefing note which was provided to members of the cabinet and various people in government by Mr. Atanu Chakravarthy who's the economic affairs secretary of the government of India. This is called The financial sector development and regulation to brackets resolution bill of 2019 or in short FSDR, this is likely to be reintroduced with a much broader framework.

So this new bill which the FSDR bill aims to provide that it is vast in its scope it covers all kinds of organizations nonbanking finance companies, systemically important companies which are going to be designated nonbanking finance companies, cooperative banks for the first time ever regional rural Banks or urban banks every kind of financial institution is going to come under a financial resolution that's a good part but;

The bill also says on record that the Bail-in provision has been withdrawn now that is a bit of a deceptive statement, so the Bail-in provision exists but it's different. The bail-in provision first is going to be first of all the premium is going to be risk-based this is what was being asked even to the Deposit Insurance guarantee which the government hadn't done but while talking about the bail-in provision everything about it is completely vague because under the bail-in which they say has been removed a certain minimum threshold is guaranteed which today is 1 lakh irrespective for everybody. They want to raise it they don't say how much, they don't even seem to want to fix it so they're not saying it's going to be 5 lakh or it's going to be 10 lakh of your deposit per depositor that's going to be in short that will be decided apparently by the resolution authority this doesn't sound nice.

In fact, I would say that we are not clear how it's going to work we hope that when the bill is introduced is going to be debate various other stakeholders are going to ask for changes so remember this is a draft bill still secret and exclusive and there may be changes to it so let me highlight quickly.:

What are the provisions of this bill?

So because it's so broad in its scope it is going to require an amendment a whole bunch of statutes, every single statute in fact from the RBI Act, SEBI Act, Housing Development Act, Income Tax, GST Act. Many of these changes are procedural so it's not material they're tiny tiny amendments that are required to all these acts to put in places a resolution framework.

Now the bill has defined so how does resolution happen so there going to be some triggers which are going to start the resolution process the central part of this bill is what is called a Resolution Authority this is the authority to which everybody has to go when of financial entity looks, like it's going to have payment problems that are about to default or probably need liquidation. This Authority will have representation from all the sectoral regulators.

So in the financial sector we have five regulators :

The Reserve Bank of India
The Securities Exchange Board of India.
The insurance regulator.
The pension regulator.
The central government also will be represented.

The structure is going to be that the resolution authority at one level is going to be a self-sustaining body. A key part of the resolution Authority is the resolution Authority insurance fund.

Now any of you who have followed what happened in PMC bank know that suddenly we've all realized that the Deposit Insurance guarantee corporation, guarantees one lakh of each depositor right and banks are paying a premium in order to get that insurance. That Deposit Insurance guarantee which was under a separate Act 1961 is going to be repealed and you're going to have a new Act which is the resolution authority insurance fund. This fund is what will give you that minimum guarantee and we don't know but it may be across banks as well as other institutions if they are going to chip into this will be the key. They also say that Deposit Insurance is going to be raised how much will it be raised it's not known.

Another part is that there are two other components to this resolution authority structure one is the Resolution Authority resolution fund which will be collecting resolution fees from those who need to go for the resolution, how much what still unknown and there's a Resolution general fund for meeting administrative expenses, it'll also collect fees from specified service providers again we don't know what that means already people are paying fees to sectoral regulators to all market intermediaries have to pay fees all over again to yet another body that's being created we don't know Then each regulator will be tasked with creating a prompt corrective action framework so they are trying to see here that each regulator has not lost all this Authority, each sectoral regulator rather funny because they've all failed so far in preventing any kind of scam happening but they're going to have triggers for when the action has to be started and this is going to divide companies into multiple levels so one would be whether it's normal so this there's going to be risk-based assessment and only when certain critical triggers are reached where things are called critical or it requires imminent resolution so the out of the five classifications that's when the resolution Authority steps in until then it has no role.

What is the level of risk? how much will be paid?

As you all know this time also cooperative banks are included in the massive resolution Authority system but they have never paid risk-based premiums and all the insurance that has been paid so far in the last 20 odd years has gone all to be bailout or it's not even bailing them out shutting them down and it's a payment to depositors of cooperative banks up to one lakh which is rather small.

So key features which are of relevance they're going to decide which are systemically important financial institutions(SIFIs) so far the number was less and they had stringent disclosure requirements they're going to increase the number probably because what they say is that those who are newly designated will have some the time given to them in order to meet all the requirements, then the resolution Authority will initiate action against the entity depending on like I said on the classification at the critical stage. The types of resolutions again give wide powers so the resolution Authority can do the following and this is where the bail-in aspect becomes important because if the resolution Authority is allowed to transfer whole or part of the assets and liabilities to another entity,so only assets and liabilities which could be done even now in fact it was done with Memon co-operative bank and Bank of Baroda but that power is back again so instead of a takeover it is only assets and liabilities. Does that leave depositors high and dry we don't know it may or it may not but it can create a bridge service provider, it can cancel or modify liabilities. We don't know what the implication of this is where it means to cancel liabilities does it mean even a liability to a depositor to repay their deposits it is more than possible. In fact, this could be the alternative to what is called a Bail-in. It will have the power to Force mergers, Acquisitions, Liquidation. or a Runoff, in the case of an insurance company.

Administrator ship when the resolution process kicks in an administrator will be appointed will act like a receiver and who will take care of things.

I think we the people have to be alert to the fact that this draconian bill that was proposed in the past is coming back again. A lot of stakeholders have got a copy of this secret note. These stakeholders, they are all the people on the other side whom we have to worry about which is insurance companies, cooperative banks, the regular banks, the financial entities which have in the last year created such havoc because they failed.