CRACKGRADEB@GMAIL.COM WWW.CRACKGRADEB.COM M.NO.

9971687048

The Financial Resolution and Deposit Insurance (FRDI) Bill, 2017

What is the issue?

The Financial Resolution and Deposit Insurance (FRDI) Bill has raised many concerns
with Bank unions and depositors.
What is the FRDI Bill?

 It aims to limit the fallout of the failure of institutions like banks, insurance
companies, non-banking financial companies, pension funds and stock
exchanges.
 The FRDI Bill is aimed at insuring the money of a bank’s depositors in the case
of an eventuality where the bank would have to be liquidated.
 The FRDI Bill is currently pending before a Standing Committee of Parliament.
 The committee will submit its report in the upcoming winter session of
Parliament.

What are the concerns?

 It has been criticised that people’s money was being used to bail out banks that
made bad lending decisions.
 It is also apprehended to be compromising on the interests of the depositors.
 Power - The bill proposes the setting up of a Resolution Corporation.
 The direction and management of the corporation vests with the Board, subject
to the terms and conditions of the Act.
 Six of the 11 members of the Board will be nominated by the government, giving
it the final say in decision-making.
 The greater representation in the Resolution Corporation gives the government
overweening powers.
 Notably, debt restructuring and ensuring the robustness of financial institutions
was previously the domain of the RBI.
 Bail-in clause - This clause gives banks the authority to issue securities in lieu of
the money deposited.
 The insurance option covers only Rs.1,00,000 of the principal.
 The remainder of the sum deposited with a bank will be converted to tradable
financial assets which can be redeemed.
 The contention is that their value will not be immediately commensurate with the
deposit amount.
 As the bank has filed for bankruptcy, the value of assets held would have also
eroded.
 Notably, other countries that have experimented with a bail-in clause have not
fared well.
 E.g. In Cyprus, depositors lost almost 50% of their savings when a “bail-in” was
implemented by the resolution corporation.

1
CRACKGRADEB@GMAIL.COM WWW.CRACKGRADEB.COM M.NO. 9971687048

About the Committee: In his Budget Speech 2016-17, the Finance Minister had
announced: A systemic vacuum exists with regard to bankruptcy situations in financial
firms. A comprehensive Code on Resolution of Financial Firms will be introduced as a
Bill in the Parliament during 2016- 17. This Code will provide a specialised resolution
mechanism to deal with bankruptcy situations in banks, insurance companies and
financial sector entities. This Code, together with the Insolvency and Bankruptcy Code
2015, when enacted, will provide a comprehensive resolution mechanism for our
economy.

Following this announcement, on March 15, 2016, the Ministry of Finance issued an
Office Order to constitute a committee to draft and submit a Bill on resolution of financial
firms,

. The Committee has the following members:

• Shri Ajay Tyagi, Additional Secretary (Investment), Department of Economic Affairs –

Chairperson

• Member- Department of Financial Services

Member – Reserve Bank of India

Member – Deposit Insurance and Credit Guarantee Corporation

Member – Securities and Exchange Board of India

Member – Insurance Regulatory and Development Authority of India

Member – Pension Fund Regulatory and Development Authority

Member- Adviser (FS), DEA

Member Convener - Adviser (Capital Market), DEA

The Committee engaged Vidhi Centre for Legal Policy to assist with drafting of the Bill.
The National Institute of Public Finance and Policy provided assistance under the
NIPFP-DEA Research Programme. Representatives of these institutes served as
special invitees on the Committee. The Committee has now submitted draft Bill. The
proposed title of the Bill is: The Financial Resolution and Deposit Insurance Bill, 2016.

In its work, the Committee has greatly benefited from reports of the Financial Sector
Legislative Reforms Commission (2013), and the High Level Working Group on
Resolution Regime for Financial Institutions (2014). The Committee also perused the
publications of Financial Stability Board (FSB), and reviewed the best practices in other
jurisdictions.
2
CRACKGRADEB@GMAIL.COM WWW.CRACKGRADEB.COM M.NO. 9971687048

Bill Summary: The Financial Resolution and Deposit Insurance Bill, 2017

The Financial Resolution and Deposit Insurance Bill, 2017 was introduced in Lok Sabha
by the Minister of Finance, Mr. Arun Jaitley on August 10, 2017. It seeks to create a
framework for resolving bankruptcy in financial firms (such as banks and insurance
companies). The Bill repeals the Deposit Insurance and Credit Guarantee Corporation
Act, 1962 and amends 12 other laws.

The Bill will apply to financial firms, and any other financial service provider designated
as a ‘systemically important financial institution’ by the central government.

Resolution Corporation: The central government will establish a Resolution

Corporation. The Corporation will have a Chairperson and its members will include
representatives from the Finance Ministry, RBI, and SEBI, among others. Functions:
Functions of the Corporation will include: (i) providing deposit insurance to banks (to
repay deposits to consumers in case of failure), (ii) classifying service providers (such
as banks and insurance companies) based on their risk, and (iii) undertaking resolution
of service providers in case of failure. It may also investigate the activities of service
providers, or undertake search and seizure operations if provisions of the Bill are being
contravened.

Risk based classification: The Corporation, in consultation with the respective

regulators (e.g. RBI for banks, and IRDA for insurance companies) specify criteria for
classifying service providers based on their risk of failure.

Categories of risk based on failure:

Category Probability of failure

Low Substantially below acceptable levels

Moderate Marginally below acceptable levels

Material Above acceptable levels

Imminent Substantially above acceptable levels

Critical Service provider on the verge of failure

A service provider categorized under the ‘imminent’ or ‘critical’ category will submit a
restoration plan to the regulator, and a resolution plan to the Corporation. These plans
will contain information, including: (i) details of assets and liabilities, (ii) steps to improve
risk based categorisation, and (ii) information necessary for resolution of the service
provider.
3
CRACKGRADEB@GMAIL.COM WWW.CRACKGRADEB.COM M.NO. 9971687048

Resolution: The Corporation will undertake resolution of a service provider classified

under the ‘critical’ category using options which include: (i) transfer of its assets and
liabilities to another person, (ii) merger or acquisition, and (iii) liquidation, among others.

Administration: The Corporation will take over the management of the service provider
from the date when it is classified as ‘critical’ and exercise the powers of the board of
directors. Also will supersede the board of firm.

Time limit: The resolution process will be completed within a year from the date when a
service provider is classified as ‘critical’. This time limit may be extended by another
year (i.e. maximum limit of two years). The service provider will be liquidated if its
resolution is not completed during this time period.

Liquidation and distribution of assets: The Corporation will require the approval of
the National Company Law Tribunal to liquidate the assets of a service provider.
Proceeds from the sale of assets will be distributed in the following priority order: (i)
amount paid by Corporation as deposit insurance to insured depositors, (ii) resolution
costs, (iii) workmen dues for 24 months and secured creditors, (iv) wages to employees
for 12 months, (v) amount to uninsured depositors and other insurance related amounts,
(vi) unsecured creditors, (vii) government dues and remaining secured creditors
(remaining debt if they choose to enforce their collateral), (viii) remaining debt and dues,
and (ix) shareholders.

Offences: The Bill specifies penalties for offences such as concealment of property,
and destruction or falsification of evidence. Penalties vary based on the nature of the
offence, with the maximum penalty being imprisonment for five years, along with a fine.

Currently we are offering full study materials for RBI GRADE B Phase-2 at the
cheapest price at Rs. 2499 and online study material validity will be two years
(RBI GRADE B 2018 & RBI GRADE B 2019). Kindly visit website
www.crackgradeb.com to enrol.