EDITORIALS
When the FRDI Bill Returns
When reintroduced, will the FRDI Bill address the issues of financial instability?
F
ollowing the recent meeting of the Financial Stability and
Development Council (FSDC) held on 7 November 2019—
that had the strengthening of the resolution framework of
the financial sector of the country on its agenda—there is an
emerging speculation about whether the current government will
resurrect the Financial Resolution and Deposit Insurance (FRDI)
Bill, 2017, particularly with reference to the banking sector. Recall
that this government had revoked the bill within a year of its intro-
duction in 2017, mainly due to the widespread scepticism about the
“bail-in” clause in the bill, which allegedly can make the depositors
of a failing financial institution share the burden of resolution cost
by foregoing parts of their deposits with the institution. With
household financial savings behaviour in India showing a skewed
preference towards bank deposits in the last two decades, the
security of these deposits is indeed a matter of significance.
As per media reports, the amendments to the FRDI Bill, 2017—
now renamed the Financial Sector Development and Regulation
(Resolution) Bill, 2019—are being worked out for three crucial
issues: first, to increase the deposit insurance cover of customers;
second, to iron out the contentious issues related to the bail-in
clause; and third, to decide whether this resolution framework
should apply to the public sector banks. At a time when the public
sector banks have come under the stress of bad loans, increasing
the deposit insurance coverage limit would be a welcome approach
for reinforcing depositors’ confidence in the banking system in gen-
eral, and the public sector banks in particular. Notwithstanding the
argument about the “inclusiveness” or otherwise of the coverage
limit of the deposit insurance scheme, a relevant approach of
looking at these amendments, and so to say the resolution frame-
work on the whole, is through the lens of systemic stability,
especially in the current scenario in the Indian banking sector.
The role of the “ownership” of banks towards the financial
stability, however, is a much debated issue in the country. While
the Reserve Bank of India (RBI) has attributed a positive role to the
government ownership of banks in attaining financial stability,
the Committee to Draft Code on the Resolution of Financial Firms
has blamed it for causing a “lack of competitive neutrality” in the
financial sector. With the committee arguing for the need of a “level
playing field” for both the public and private sector financial firms
for the sake of competitive neutrality, the concept of an overarch-
ing resolution framework for all financial firms gained traction.
It is from this viewpoint that the FRDI Bill, 2017 sought to amend
as many as 20 legislations for the diverse financial sector in this
country, which is regulated by a gamut of institutions ranging from
the RBI for the banks and the non-banking financial corporations,
8 JANUARY 18, 2020
to the Insurance Regulatory and Development Authority for the
insurance markets, the Securities and Exchange Board of India
for securities markets and mutual funds, and the Pension Fund
Regulatory and Development Authority for pension funds. The
idea is to bring the resolution function for any type of failing
financial entity under the single umbrella of a resolution corpo-
ration. More than the potential amendments, what should be
the intriguing question about the reintroduction of the FRDI Bill
at this point, is whether an all-encompassing resolution corpora-
tion can be really efficacious for the much-discussed financial
stability of this country.
Various fundamental issues come to the fore, in this context.
First, is the viability of the deliberate attempt to impose “neutrality”
of ownership and hence, competition, between the public and
private financial institutions by bringing them under a common
resolution scheme, despite their palpably divergent modus op-
erandi. While private financial institutions are predominantly
governed by profit motives, for the public sector agencies, various
social obligations, such as “financial inclusion,” assume primacy.
Consequently, it is hard to dismiss the fact that for the public
institutions, especially the public sector banks, it is the sense of
the government’s involvement (or ownership) that has forged
commoners’ confidence to park their financial savings with
them, conventionally. In attempts to neutralise this “ownership”
factor, if the sovereign guarantee and resolving power are out-
rightly taken away from the government domain to some resolu-
tion corporation, it may destabilise the financial system.
Second, and in tandem with the first issue, is the controver-
sial bail-in clause. In stipulating that any deposits outside the
coverage limit of the deposit insurance will be subject to this
clause, the FRDI Bill 2017 (in)advertently suggests that deposit
amounts over and above the cover limit (which currently is at
one lakh) will be included in the bail-in mechanism. Further,
perverse to the RBI’s caution against financial instability, short-
term debts and uncategorised client assets are also currently
under this mechanism. Ironically, these provisions and the bill
per se came against the backdrop of the Financial Stability
Report, 2017 that revealed a 3.3% drop in the year-on-year growth
rate of deposits for all scheduled banks in the country.
This raises several vital questions. In the context of such deceler-
ating financial stability, why did the government undertake these
resolution reforms that could only further erode depositors’ faith in
the domestic financial institutions, particularly those that function
as the keystone of systemic stability? Given this, how hopeful can
we be of any prospective amendments if this bill is reintroduced?
vol lV no 3 EPW Economic & Political Weekly