The Government has withdrawn the controversial Financial Resolution and Deposit Insurance (FRDI) Bill which potentially allowed depositors’ money to be taken to bail out a failing bank. However, as we explain below, this was only allowed in limited circumstances and reports of depositor ‘haircuts’ were greatly exaggerated. Nonetheless, to reassure investors, the Government has withdrawn the FRDI bill.
The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 sought to set up a ‘Resolution Corporation’ for the protection of consumers and provide insurance for deposits in financial institutions. Under Section 52 of the Bill, the Resolution Corporation was allowed to subject depositors to a ‘bail-in.’ This means a portion of their money could be used to make up for the losses incurred by the bank. This could be done, for instance, by converting depositors’ money to shares (which might later lose value) in the bank to shore up the bank’s capital in the event of a crisis.
However, there were three good reasons why the panic over the bill was unjustified:
Such a bail-in would not have affected insured deposits. This is currently up to Rs 1 lakh under the DICGC (Deposit Insurance and Credit Guarantee Corporation Act). The new insurance limit would have been decided by the Resolution Corporation and it is unlikely to have been a lower amount.
The Resolution Corporation itself would have consisted of persons appointed by the Central Government and representatives of other regulators such as SEBI, IRDA and PFRDA. Such a body is unlikely to make a recommendation harming the interests of a large body of depositors.
The law stipulated that a bail-in cannot make depositors worse off than their position in the event of a liquidation.
Nonetheless, the mere possibility of penalising depositors sparked off alarm among certain sections of the public. There was also a surge in cash withdrawals in March-April 2018, causing a ‘cash crunch’ in several parts of India. The Government hence decided to withdraw the bill to allay fears regarding it, in the public mind.