Financial Resolution and Deposit Insurance Bill | 03 Jan 2022

Why in News

Recently, the Finance Ministry has sought views of the Reserve Bank of India (RBI) on drafting a modified version of the Financial Resolution and Deposit Insurance (FRDI) Bill in order to deal with Insolvency of Firms in the financial sector.

• In 2018, the Government had withdrawn the FRDI Bill 2017 amid concerns over the security of bank deposits.

Key Points

• Background:
  • The FRDI Bill, 2017 was meant to address the issue of insolvency of firms in the financial sector.
  • If a bank, NBFC, an insurance company, a pension fund or a mutual fund-run by an asset management company fails, a quick solution is available to either sell that firm, merge it with another firm, or close it down, with the least disruption to the system and other stakeholders.
  • It aimed to limit the fallout of the failure of institutions like banks, insurance companies, non-banking financial companies, pension funds and stock exchanges.
  • The Bill was withdrawn due to concerns among the public over safety of deposits despite assurances by the Central government.
  • A key point of criticism was the so-called bail-in clause in the Bill that said in case of insolvency in a bank, the depositors will have to bear a part of the cost of the resolution by a corresponding reduction in their claims.
• About the New Bill:
  • The bill will provide for establishing a resolution authority, which would have powers to undertake prompt resolution for banks, insurance companies and systemically important financial firms.
  • The legislation will also provide for an insurance of up to Rs 5 lakh for bank depositors, which already has a legal backing.
• Need for legislative backing:
  • Even as the RBI has come out with a Prompt Corrective Action framework for NBFCs (Non Banking Financial Companies), a need is being felt for a legislative backing for the entire financial sector.
  • The current resolution regime is especially inappropriate for private sector financial firms in the light of significant expansion and many of these acquiring systemically important status in India.
  • The provision of a single agency for resolution of financial firms is in line with the recommendations made by the Financial Sector Legislative Reforms Commission (FSLRC), 2011 headed by Justice B N Srikrishna.
  • The Insolvency and Bankruptcy Code, 2021 along with the FRDI bill would have streamlined the procedure for the winding up or revival of an ailing financial sector firm.

Source: IE