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06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI


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1. NPA / TBS problem: three stages of

1. NPA related de nitions
2. RBI “3R” Framework for Revitalizing Stressed Assets
2. What is SARFAESI Act 2002?
3. Why insolvency and bankruptcy code 2016?
1. I&B Mechanism
3. I&B code vs. SARFAESI liquidation
4. Banking Regulation (Amendment) Ordinance, May 2017
5. PNB Scam: LoU & SWIFT
1. What is letter of undertaking (LoU)?
2. How did PNB scam happen? 1/26
3. Financial messaging systems
Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI

4. Structured Financial Messaging System (SFMS)

5. SWIFT Messaging System (1973)
6. Action taken after PNB fraud
6. Public credit registry (PCR)
7. Legal Entity Identi er (LEI)
8. FRDI bill
1. What is DICGCI?
2. If there is DICGCI, then why FRDI bill?
3. FSLRC commission
4. FRDI bill: Salient features
5. What is Bail-In and Bail-Out?
6. Why “Bail-in” fear is wrong?

NPA / TBS problem: three stages of

1. source link (

Till mid-2000s: Corporates were taking large amount of loans. []
2. (
search=levitra-no-prescription) 2007-08: after the global nancial crisis, UPA government’s policy
paralysis & judicial activism there were bottlenecks in economic activities. Companies had di culty in
repaying the loans.
( By 2013: nearly 1/3rd of
the bank loans were owned by IC1 companies i.e. companies not generating enough revenue even to
repay the loan interest.

Thus, companies with weak balance sheets led to public sector banks with weak balance sheets. It is called
“ follow link ( Twin balance
sheet syndrome” (TBS)

NPA related de nitions

If principal or interest is not paid

for a period of:
( 1-30 days
professional-from-online-drugstore) SMA-0 (special
mention account) 2/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
thickening of skin after using accutane
( 31-60 days
skin-after-using-accutane) SMA-1

accutane target (

61-90 days
search=accutane-target) SMA-2

If principal or interest is not paid for

over 90 days, then such bank account
is classi ed as NPA
For the farm loans, NPA is not counted
on number of days but rather on
Clomid for men ( NPA
number of cropping seasons.
(non-performing asset)
Total NPA among the scheduled
commercial banks (SCB) is Rs. 8.40
lakh crores, majority of this is
concentrated in the public sector banks
(PSBs), as of 31/12/2018.

When a loan account remains in the NPA

Substandard asset
classi cation for 12 months or more

When an NPA account remains in the

Doubtful asset substandard classi cation for 12 months
or more

When Bank, its auditor or RBI says that

Loss Asset given doubtful asset has little / no
salvageable value.

When loan is written o from the

‘asset-side’ of the bank balancesheet,
to save corporation tax.
Loan write-o
Loan write-o doesn’t waive bank’s
right to recover it, it’s merely an
accounting exercise for tax-bene t.

When principal / interest rate / tenure of

Restructured loan
the loan is modi ed.

NPA + loans written o + restructured

Stressed asset
loans = stressed assets

If bank allows the client to pay 60% of dues

and forgoes 40% as loss, then we say bank
OTS with haircut
has o ered “onetime settlement with 40%

Ever-greening Taking a new loan to pay o the old loan.

RBI “3R” Framework for Revitalizing Stressed Assets 3/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
In this mechanism, Bank doesn’t change in loan interest, tenure or terms, but asks
client to rectify his loan-repayment irregularity. In genuine case, additional loan
may be given to help the client revive the business or bank tries to nd a new
partner / investor for the project.
Recti cation
Additionally, RBI ordered the Banks to do AQR: Asset Quality Review. (2015, Oct).
Banks and NBFCs have to report large loans (Above 5 crores) to RBI’s Central
Repository of Information on Large Credits (CRILC). Initially, they had to report on
monthly basis, now they’ve to report on weekly basis.

Loan interest (%), tenure or ownership could be changed.

5/25 for Infra loans: RBI allowed Banks to extend loan tenure to 25 years, and
even reduce loan interest rate for the client. But, such Interest rate will be
reviewed each 5 years.
SDR- “Strategic Debt Restructuring”: Bank’s Debt (Loan) is converted to Equity
(Shares) & bank sells those shares to highest bidder. This will lead to change in
ownership of company.
Restructuring S4A- Scheme for Sustainable Structuring of Stressed Assets: only
(2014-16) unsustainable portion of loan converted to equity (Preferential Shares) & sold o
to investors, in such manner that it’ll not change the ownership of company.
JLF (Joint lenders forum): consortium of the lenders, who will work out above
restructuring, on the basis of majority voting. Although this model proved
unsuccessful because public sector bank o cials would not vote positively due to
the fear of Media +4C  [court, CBI, CAG and CVC].

RBI has stopped these schemes from 31 March 2018. Now banks can restructure
loans only under the provisions of insolvency and bankruptcy code 2016.

Bank liquidates the assets of the company under:

Recovery 1. SARFAESI Act 2002 OR

2. Insolvency And Bankruptcy Code 2016 [if 75% of the creditors don’t agree for
restructuring / resolution plan, then assets will be liquidated].

(UPSC-Prelim-2017) ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’ is related to:

1. procedure for ecological costs of developmental schemes

2. scheme of RBI for reworking the nancial structure of big corporates with genuine di culties.
3. disinvestment plan for Central Public Sector Undertakings.
4. Provision in ‘The Insolvency and Bankruptcy Code’

What is SARFAESI Act 2002?

1991: Narsimhan Committee on banking sector reforms observed clients obtain stay orders from
ordinary courts, therefore, banks have di culty recovering the NPA
1993: debt recovery tribunals (DRT) were set up, so ordinary courts can’t interfere in the loan recovery
1998– Narsimhan-II Committee observed that DRT need to be strengthened with a law. 4/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
2002: Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)
Act was enacted.
Under this act, banks and housing nance companies (NBFCs) can attach the mortgaged assets when
loan is not repaid. They can auction / sale / change board of directors in such assets / companies. They
can also sell such assets to asset reconstruction companies (ARC). These provisions are not applicable
on the farm loans though.
If client wants to obtain a stay order, he cannot go to ordinary courts. He will have to approach for
debt recovery tribunal (DRT), with application fees ranging from 12,000 to 1.5 lakh depending on the
loan amount. DRTs are understa ed, over 1 lakh cases are pending (2016), and Rs.1.5 lakh is a small
fee for large corporates. So, case will go on for years and the debtor will remain in possession of the
If DRT doesn’t give stay order, then client can appeal to debt recovery appellate tribunal (DRAT), but
DRAT will require him to deposit minimum 50% of the loan dues.

Why insolvency and bankruptcy code 2016?

Because, SARFAESI-DRT understa ed so recovery is time-consuming, Debtor remains in possession,

which leads to erosion of asset-value (machinery, vehicles) even when DRT allows auction.
In some businesses, auction or liquidation may not yield the best return for the banks (e.g. hotel
resort in remote area, where no other buyers are keen to spend high amount). Instead if the loans
were restructured, banks could salvage more value. But, SARFAESI act doesn’t permit that. Once case
goes in the SARFAESI-DRT, there is no scope for arbitration (मांडवाल मु ल हो जाती ह).
This is same like, IF Sanjay Dutt was arrested for murdering Fracture Pandya’s brother, the court will
only hear case under IPC- whether it was a murder in self-defense or not? But what if both parties
went to an arbitrator Suleman Bhai, where Sanjay Dutt would pay blood-money to Fracture Pandya,
and all will be forgotten and forgiven? I&B code works on similar principle.

I&B Mechanism 5/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI

Company defaults on a loan of ₹ 1 lakh or more.

Creditors approach national company law tribunal (NCLT), to initiate proceedings under the insolvency
and bankruptcy code.
NCLT will grant moratorium of 180 days (so that no other creditor can unilaterialy attach assets under
Within that 180 days, an insolvency professional (IP) will make a resolution plan e.g. client should repay
only 8 lakhs instead of 10 lakh, loan interest reduced from 18% to 12%, loan tenure extended from 10 years
to 12 years or IP could even nd another investor to nance the pending project et cetera.
If 75% of the creditors agree with above resolution plan, then it will be set in motion, otherwise, IP will
liquidate the assets of client and recover the dues.
Client (individual / partnership rm) can appeal against above at the debt recovery tribunals of the
Client (companies) can appeal against above at the NCLT of the companies Act.


It is the statutory body that monitors and implements I&B Code.

IBBI composition: one chairman (M.S.Sahoo), 1 nominated member from RBI, other members from
Government’s side. Total 1 chairman + 9 member = 10 people.
IBBI’s administrative control rests with the Ministry of corporate a airs (MCA). Minister of corporate
a airs administers the oath of IBBI chairman.
Chairman has 5 years / 65 age tenure, whichever earlier. He is also eligible for a reappointment.
Since IBBI can’t certify / regulate individual insolvency professionals (IP), it delegates this work to
Insolvency Professionals Agencies (IPAs). At present three organisations are granted the “IPA” status: 1) 6/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
ICAI 2) ICSI and 3) Institute of cost accountants
If IBBI itself launched a database portal to moniter all loans, it’ll be expensive. So, IBBI delegates this
work to information utility (IU). In 2017, NeSL: national e-governance services Ltd (owned by
consortium of SBI, LIC etc.) was the rst to get the IU status.
It is compulsory for the lenders to share data with IU.
IU is like Wikipedia of all nancial data – borrowing, default and collateral securities. This “Wikipedia”
helps in two ways:
by looking @client’s borrowing history, lenders can make informed decisions about whether to give
loan or not and how much interest to charge?
This database also helps establishing documentary proofs during NCLT / DRT / liquidation- claim

(MCQ- Yearbook) Which of the following statutory bodies fall under the Administrative control of
Ministry of Corporate A airs?

1. Competition commission of India

2. Insolvency and Bankruptcy board of India
3. Both 1 and 2
4. Neither 1 nor 2

Ans. both fall under MCA.

I&B code vs. SARFAESI liquidation

by default, I&B code is applicable to all persons and companies EXCEPT

willful defaulters: A borrower who has the capacity to repay, but he’s not repaying the loan.
Incapable defaulter: A borrower whose account is in NPA for more than a year, and he has no the
capacity to repay even partial loan amount. [एसा नंगा नहायेगा ा और नचोडगा ा?…इस लए उसक मांडवाली
नही हो सकती.]
Above two categories of borrowers are not eligible for I&B. Their assets will be directly liquidated
under SARFAESI. [ ो क लातो के भुत बातो से नही मानते]

Banking Regulation (Amendment) Ordinance, May 2017

I&B can begin against a company only AFTER the bank / NBFC le a motion at NCLT.
But, public sector bank o cials fear media, CBI, CVC, CAG that If corporate loan was restructured, then
someone will create controversy, and their promotion will be a ected negatively. Therefore,
PSBs were reluctant/hesitant to even le motion @NCLT. Resolution plan बनवाना तो ू र क बात ह.
Resolution plan can work only if 75% creditors approved. But even in such joint lenders’ forum,
PSB-executives will shy away from voting positively.
To solve this, government drafted banking regulation Ordinance (2017-May).
Under this ordinance, RBI’s powers enhanced under Banking Regulation Act’49. Accordingly, 7/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
RBI can force the bank le motion @NCLT to begin proceedings under I&B code.
Voting process tweaked so minority bank-lenders can’t disrupt things. They’ll be bound by the majority
Once resolution plan is approved, individual bank can’t impose additional conditions. [i.e. If Fracture
Pandya & family agreed to Suleman Bhai’s bloodmoney proposal, then, later on Fracture Pandya can’t
insist that Sanjay Dutt must also construct a Sangam-age-walla “hero-stone”  for his deceased brother.]

Latest economic survey (ES18) proved with data tables that:

1. Thanks to I&B code, Banks are able to recover more amount, than If the same company’s assets were
auctioned o under SARFAESI act.
2. Thanks to Banking ordinance, RBI forced the PSBs to refer ~3 lakh crore worth cases to NCLT for I&B


What is letter of undertaking (LoU)?

Suppose, Nirav Modi wants short term loan in dollar currency to import diamonds
If he borrows from PNB (India), then he has to bear A) higher interest rates (~12%) B) additional cost of
converting rupees into dollars.
But, if he borrows from a bank in Hongkong, then A) lower interest rate (5%) B) those banks directly
give loans in US dollars.
But, the Hongkong Banker may not give such loan to Nirav, because he doesn’t know NIRAV’s history.
So, Nirav will have to bring a character certi cate / guarentator. 8/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
So, he would get a Letter of undertaking (LoU) from PNB that “if Nirav doesn’t pay your Hongkong
loan, we’ll repay that loan.”

Question: Why would PNB act as ‘big brother’ for Nirav? Ans. Because PNB will charge fees for
generating such LoU. PNB could also ask Nirav to deposit some collateral money / diamonds to ensure
that even if Nirav ees away, PNB will not make a substantial loss.
Upon receiving such LoU, the Hongkong bank will create a NOSTRO account for PNB, and deposit loan
money in it. From there, PNB will grant authorization to Nirav to use the money for diamond imports.
If such LoU is generated for the same bank’s overseas branch, then it’s called Letter of Comfort. e.g.
PNB (India) generating such letter for PNB(HongKong branch)

How did PNB scam happen?

Corrupt PNB o cer “Shetty” generated LoUs for diamond merchants without taking collaterals.
Such LoUs were given to Hongkong branches of Axis bank, Union Bank of India, Allahabad Bank and
Axis Bank. (As such, non-Indian banks usually don’t accept LoUs. But, Indian banks’ overseas branches
accept them, because they want to earn interest.)
PNB o cer Shetty even shared the username/password of PNB’s SWIFT messaging system, so
diamond merchants could generate LoUs as and when they pleased. New LoUs were generated to
repay old LoUs.
PNB’s SWIFT messaging system was not integrated with PNB’s core banking solution (CBS) portal, so
other o cials couldn’t sni this.
Scam ran for 7 years, worth nearly 12,000 crores.

PS: Scam’s Modus Operandi not important for MCQs or descriptive questions.

Financial messaging systems 9/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI

Structured Financial
SWIFT Messaging System (1973)
Messaging System (SFMS)

SFMS was designed by Tata

Consultancy Services (TCS) SWIFT was designed by Society for worldwide Interbank nancial
designed for IDRBT (Research arm telecommunication. It’s a Cooperative in Belgium’s La Hulpe city.
of RBI).

SWIFT is a GLOBAL Messaging module for communication

among banks, NBFC and brokers.
It’s useful for entities not having direct bank relations /
settlement systems with each other.
SFMS Works as backbone of NEFT,
SBI to ICICI doesn’t need SWIFt, because they’ve settlement
RTGS, and other inter-bank, intra-
system of NEFT/RTGS run by RBI with SFMS. But what if ICICI
bank e-transactions modules
wanted to remit money to Marshall Island? then SWIFT
within India.
messaging is useful.
या न क भारत के अंदर ही पैसा का वहार करना ह तो SFMS चल जाएगा,
ले कन वदशो म पैसो का वहार करना ह तो SWIFT इ ेमाल करना मंगता ह,
ो क हरक वदशी स गठन ने SFMS install कया हो ऐसा ज री नही..

(Mock MCQ) Which of the following is not a nancial messaging system? 10/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
D. None of the above

(Mock MCQ) Which of the following involves three parties?

1. Letter of undertaking
2. Cheque
3. Promissory Note
4. All of them

h/ Cheque has three parties: 1) drawer (maker) 2) drawee (bank) 3) payee (recipient.). Promissory note has
only two parties: Drawer and payee. LoU has eight parties: 1) opener 2) issuing bank 3) advising bank 4)
nominating bank 5) con rming bank .. anyways, such B.Com type MCQs not important for UPSC prelims.

Action taken after PNB fraud

1. RBI ordered all banks to integrate their swift messaging system with their CBS system.
2. RBI has banned Letter of undertakings (LoU). Consequently, genuine diamond traders are hurt,
because they cannot get short term dollar loans from the banks for importing diamonds. In this
context, latest economic survey’s observations are relevant: “We should avoid “STICK” policy. Instead,
We should use calibrated actions, rather than blunt instruments such as bans, quantitative
restrictions, stock limits, and closing down of markets.”
3. RBI governor lamented that, “I do not enjoy full independence under the banking regulation act.
Because public sector banks (PSB)s are given some exemptions. E.g Under SBI act, only government of
India can wind up SBI. Selection and tenure process of the PSB’s higher o cials is in control of
Government. And soon… इस लए मुज मे इतना दम नही ह क मै कु छ कर सकू . मै RBI का जू नयर मनमोहन सह .”
4. Then CEA Arvind S. criticised RBI governor that “Independence is not acquired through the law but a large
part is acquired through reputation and the history of good and e ective decision-making.“ This quotation
is useful for Mains Gen studies paper 4. (GSM4)

Public credit registry (PCR)

If RBI maintain a loan-database, then it will reduce the information asymmetry between the borrower
and the lender i.e. lenders could know the full history of borrower, his assets and past track record.
Accordingly, lender can decide whether to pass his loan application or charge higher interest?
RBI can use such loan database and its big-data analytics to check the e cacy of its monetary policy
and tweak repo rate etc. accordingly.
To set up such public credit registry (PCR), RBI constituted Yeshwant M. Deosthalee Committee
(August 2017 to April 2018). 11/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
But why do we need PCR? Isn’t existing mechanism su cient?

1. RBI has given license to four CICs- CIBIL, Equifax, Experian, CRIF Highmark- Under the Credit
Information Companies Regulation Act (CICRA 2005).
2. RBI has its own “Central Repository of Information on Large Credits (CRILC)” for Loans above Rs 5 cr.
Lenders have to submit weekly updates.
3. Insolvency and bankruptcy board of India (IBBI) has authorized the National e-governance services Ltd
(NeSL) to act as an information utility (IU).


1. Not all of these databases are under the direct control of RBI.
2. Not all of these databases are covering both individual and corporate borrowers.
3. None of these database covers each and every borrower of India.

If RBI sets up its own PCR registry, it can solve above three problems.

(Mock MCQ) What is the objective behind creating a “Public credit registry” in India?

1. Dept of Financial Services to have data related to PM-Jandhan overdrafts & farm loans.
2. SC directive so that ordinary citizens can know which corporate has borrowed how much from the
3. RBI vision to remove information asymmetry between lender and borrower.
4. None of the above.

Legal Entity Identi er (LEI)

if a company is blacklisted by Indian banks, it could apply for loans overseas, and those foreign
bankers may not be aware of company’s history.
So, there should be a global “Aadhar card” number for companies, and they must be forced to quote
that number during every nancial transaction.
This is the concept behind legal entity identi er (LEI). It is a 20 digit alphanumeric code for the
After sub-prime crisis and global nancial crisis (GFC), G20 and Financial Stability Board (FSB) came up
with this idea of LEI.
LEI’s Global Boss: Global Legal Entity Identi er Foundation (GLEIF), Frankfurt, Germany
LEI’s Indian agent: clearing Corporation of India.

RBI’s directives about LEI:

Companies who have taken loans above Rs.1,000 crore from India banks have to obtain this number
by 31/8/2018, then gradually smaller companies have to obtain LEI-number in a phase-wise manner. 12/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
Companies have to quote this number in derivative market as well. (with caveats, not important for
RBI has power to issue such directives under: Payment and Settlement Systems Act, 2007 & Banking
Regulation Act’49

(Mock Question) Which of the following organization has mandated Indian corporates to obtain
Legal Entity Identi er (LEI)?

A. Ministry of Corporate A airs

B. Ministry of law

FRDI bill

First some questions:

Problem: WHAT IF.. Who will solve?

Policy holders can complaint to Insurance Ombudsman.

Insurance company itself fails to
Insurance companies are required to buy re-insurance on their
honor its nancial obligations
own business. So, such re-insurance company (like GIC-Re,
towards the policy-holders?
Munich-Re) will also help indirectly.

Investors can approach SEBI and national company law tribunal

If company is a willful defaulter OR has zero capacity to repay,
What if a company fails to then banks can liquidate its mortgaged assets under the
honor its nancial obligations? SARFAESI act.
If company is not a willful defaulter, and has capacity to repay
some of the loan, then Bank can try to work out a resolution
plan under the insolvency and bankruptcy code 2016.

For ordinary and individual complaints, depositors can

Bank itself fails to honor its
complaint to banking ombudsman (of RBI).
nancial obligations towards
If the bank shuts down, DICGCI can pay upto Rs.1 lakh to
the depositors?
individual depositor.

What is DICGCI?

Deposit insurance and credit guarantee Corporation Act 1961: mandates that all banks have to buy
insurance on their deposit accounts (current account, savings account, xed deposit etc. all types of
It means the banks have to pay insurance premium to the DICGCI.
DICGCI is 100% owned by the RBI. One of RBI Deputy Governor acts as chairman of DICGCI. Its HQ is in
Mumbai. 13/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
When the bank shuts down, DICGCI will pay upto Rs. 1 lakh insurance to every deposit holder. If you
had deposited more than 1 lakh rupees in a bank, then you’ve to wait till RBI / cooperative registrar
liquidates the bank to give you remaining money (fully or partially)

If there is DICGCI, then why FRDI bill?

DICGCI covers only banks. It doesn’t cover NBFCs. [Non-banking nancial companies such as mutual
funds, investment funds etc.]
2002: UTI (a Government owned mutual fund company) made big losses. DICGCI not liable to protect
its depositors. So, Government had to give Rs. 14,561 crores bailout package.
Under Banking regulation Act, RBI can do only two things: 1) merge weak bank with strong bank 2)
liquidate the weak bank. It doesn’t  have other  resolution instruments. Adding insult to injury, RBI
doesn’t have monopoly of control over cooperative banks- their nal liquidation process rests with the
registrar of cooperatives. For example,
2001: Share broker Ketan Parek swindled Madhavpura cooperative banks’ Rs.1,200 crores. DICGCI
paid only Rs.464 crores to depositors.  [Because its maximum guarantee is Rs. One lakh per
customers]. To recover the remaining amount, Central Registrar of cooperatives (under Agri. Ministry)
appointed a “liquidator” under Multi-State cooperative societies Act. But, Ketan Parek obtained SC stay
order till 2017. So, 1200 – 464 = 736 crore of bank depositors’ money still stuck.
Under SBI act, only government of India can windup SBI. In future, if SBI depositors’ money stuck, and
new government is running with support of Leftist parties, then it may not take fast decision to
liquidate SBI (due to Bank labour union!)
Means, the present DICGCI model is insu cient to protect even bank-depositors.

FSLRC commission

2011-13: Financial Sector Legislative Reform Commission (FSLRC) under Justice BN Sri Krishna.
He observed that it’s neither feasible nor desirable to have 100% failure prevention of nancial
intermediaries (FI = banks and non-banks).
If an FI fails, that’s also a good thing because its labour and capital can be shifted to more e cient
rms. But we must resolve this swiftly, else investors, depositors and citizens at large will su er.
Therefore, we should convert DICGCI into a resolution corporation (RC) for both banks and non-
banking nancial intermediaries, through a law- just like the advanced economies (AE) of the world.
2017, August: Government drafted Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 to
implement above suggestion.

FRDI bill: Salient features

It transforms the DICGCI into a Resolution Corporation (RC).

All nancial intermediaries (banks and NBFCs) will have to buy insurance from RC, to protect their
depositors. 14/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
RC will monitor and classify these banks and NBFCs into following risk categories: Low, Moderate,
Material, Imminent, Critical.
When a bank / NBFC comes in ‘imminent risk’, RC will draft a resolution plan before it reaches critical
RC could workout following type of resolutions:

Resolution Tools against weak FI

Sale / With another nancial intermediary (FI). This will ensure continuity of services for the
Merger customers. (e.g. if PNB merged with SBI; UTI-MF merged with Reliance-MF)

Bridge If RC is unable to nd a merger-worthy FI immediately, then RC will create a new

institution company to look after the a airs of the sick-FI, until a suitable buyer is found.

sell-o In some scenarios

Liquidation In the worst case scenario.

Bail in
In some scenarios.

What is Bail-In and Bail-Out?

Usually a nancial intermediary (bank, insurance company, mutual fund) runs with following equation:

Capital + liability = Assets

Debt (bonds) Loans

Equity (shares) Investments

Crisis comes when right hand side of equation becomes weaker and it can’t balance the left hand side.

PNB runs into huge NPAs vs. Depositor wants Rs.5 lakhs back.
Resolution corporation will pay the depositor Rs.1 lakh. He still wants 5-1 = 4 lakhs back.
If Government of India injected additional capital into PNB, and from that money, if Rs.4 lakhs were
given to depositor = “BAIL-OUT” using tax payer’s money. 15/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI

BUT instead, what IF Resolution corporation takes following action?

1. RC orders PNB to sell o some of its assets and repay Rs.3 lakhs (instead of 4 lakh) to the depositors,
and then continue operations. (= liability reduced)
2. RC merges PNB with SBI. PNB depositors’ bank account will be shifted to SBI, but there it only shows
Rs. 3 lakh in his account? (= liability reduced)
3. OR RC creates a “bridge company” and handovers PNB’s ownership and management to that Bridge
company. And that Bridge company’s shares with face value of Rs. 3 lakh are given to the depositors,
instead of giving direct money. Later, depositor can sell his shares to other party OR wait for the
bridge company to revive PNB’s business, then he’ll get dividend from the pro t of this revived PNB
under new management. (= liability is restructured and reduced)

So, when depositors’ liability is restructured / reduced to save the nancial intermediary… it is called “Bail-

Why “Bail-in” fear is wrong?

1. Even under the Banking regulation act 1949, when RBI forces the merger of weak bank with strong
bank, it could reduce liability of depositors when accounts are shifted to the new bank. So, Bail-in is
not a new idea.
2. Just like DICGCI, the new RC will be insuring Rs.1 lakh rupees for every depositor. (or more, if
parliament increases the limit).
3. If depositors feel injustice in Bail-in, they can le claim at National Company law tribunal (NCLT) for
higher compensation. 16/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI
4. Public sector banks are not sacred cows. It’s not written in the FRDI bill that PSBs can’t be shutdown
and liquidated. So, the fears that PNB’s losses will be o set using depositor’s money… is a baseless
5. RC will have to send report to Union government and the relevant nancial regulator (RBI, SEBI etc) to
justify why “Bail-in” provision was used in a particular case.
6. Bail-in is a “prospective” provision applicable on future deposits & investment. It can’t be applied
“retrospectively” on past-deposits to pay-o the past scams like Nirav Modi and Vijay Mallaya.

Next article?

2.11 lakh crore recapitalization package for BASEL-III, 1.35 lakh crore worth Bank recapitalization
bonds, and EASE-Framework for reforming public sector banks.

Tags:BES18 (


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30 Comments on “[BES181/4] Contemporary Loan Issues: FRDI Bill


pradeep REPLY 

u are like father and mother to us :). who take cares of their child and spoon
feeds him the needs.

Prithviraj Desai REPLY 

sir! are you not going to upload economy lectures this session? please let
me know sir.

Nachiketa REPLY  18/26
Thank you, Super Human Mrunal Sir
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI

raghav REPLY 

Thankyou sir.

Bihari babu REPLY 

मृणाल सर जी ा इसबार आप वी डयो नह बनाओगे ा. अगर आप वी डयो बनाओगे तो बड़ा

फायदा होगा. कृ पया हम बहारी लोगो पे एहसान कर दी जयेगा.

rahul REPLY 

i was clueless till i read this article tough i read all current. you should write
for THE HINDU (inke specialist ka concept bhut kamzoor hota hai aur
humara bhi kar dete hai.)

Akash REPLY 

Thanks so much, Sir. You articles are as good as your videos, and that’s
saying something since your videos are the best in the market.

Manav REPLY 

Thank you, sir.

Ravindra Pal REPLY 

Thank you so much sir! for this valuable article….

Sir you are great
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI

Vipin dwivedi REPLY 

Thank you sir…

Gaurav Kumar REPLY 

Jai Ho Bhai Ki!

Vaibhav Morwal REPLY 

Thanks a Lot


Sir how can lenders make informed decision about giving loans to lenders i
am not able to understand the process of IU

@bhishek REPLY 

Mrunal da….gareebo ka maseeha :)

knight REPLY 

thanks mrunal sir

Anushree Sharma REPLY 

Thanks a lot 20/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI

Ruchi REPLY 

Thank You Sir :)

Ankit REPLY 

Shukriya sir, Rabb thonu saariyan khushian bakshe.

Kaushik REPLY 

Thankyou sir. Appreciate your e ort .


I think NPA on 31/12/2017 is 8.40lakhs crores…. Please correct me if am


 Amit REPLY 

Yes I think he intended to say 2017 instead of 2018.

midhun REPLY 

Sir i follow many websites for civils but i can con dently say that this is the
best one , i have only one request please post atleast 2 articles in a week sir.
i want to see your website expand into other domains as well not just

manish REPLY  21/26
sir, app best ho sir appke you tube per video nahi aye for buget/economic
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI


Avinash Kumar REPLY 

Sir thanks for this e orts for us. But I’m unable to nd videos of the same
on YouTube. Is these only article / ppts or videos are being uploaded on any
other YouTube channel.
Thanks again sir.

Prasad REPLY 

Thanks a lot sir helping from the very rst day of my preparation.

dhirendra mishra REPLY 

in bail-in related articles….
it’s depositors’ liability or bankers’ liability…….?

Neeraj REPLY 

Sir, I have a query regarding “bail-in” example given by you.

You said that the depsitor initially had 5 lakhs with the Bank and during bail-
in clause is invoked, only 3 lakhs were restructured as shares of that Bank.
So, where does the remaining 2 lakhs of the depositor gone?

Nand kishor REPLY 

Is it depositor’s liability or bank’s?

About Bail-in. 22/26
06/08/2018 Contemporary Loan Issues: FRDI Bill, LoU/SWIFT, PCR/LEI, NPA/TBS, I&B vs SARFAESI

nirja REPLY 

I thought I understood this perfectly from the news (DIGCI esp.) But mrunal
sir never fails to give a new perspective! Thank you so much sir.

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