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Financial Resolution and Deposit Insurance (FRDI) Bill 2017

Jan 02, 2018(18:14)
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The government has been taking the problem of Non Performing Assets very seriously especially when they want to focus more on growth part. The current government wants to give more attention to long term growth by creating jobs and heavy investment in infra sector would help propel the growth engine.

In the past, government has tried various methods to curb the Non Performing Assets of the banks such as by passing the Insolvency and Bankruptcy Act where an apex organization called as NCLT (National Company Law Tribunal) has been formed to help recover loans from the companies who have defaulted on their loans, by asking them to either liquidate themselves or proceedings would start against them by the Tribunal. But the quantum of bad loans in the economy is to the tune of Rs. 8 lakh crore. So one act will not be able to reduce such quantum of bad loans, more such acts should be passed in the parliament so that these bad loans reduce in number.

Before delving deep into this act, one needs to know what happens with the banks or financial institution which has a high level of NPAs or whose asset quality worsens? If the banks asset quality worsens then it is merged with a stronger bank so that they their balance sheet health is improved. In the new scenario there would be a new bill introduced namely FRDI Bill. This bill is aimed to introduce the bankruptcy process for financial institutions and Insurance companies. Under this bill, a new authority called as Financial Resolution Control will be established which will be dealing with the liquidation and resolution of Banks Insurance and other financial resolution. This bill has created havoc in the market before even getting passed and the concerns are genuine. In this bill, there is a word being used called as “Bail-In Clause” in Section-52 which means if the bank is having high level of NPAs, they can pull in the depositors money to reduce the NPAs.

The new authority namely FRC (Financial Resolution Corporation) would decide upon the fate of banks and any bank which has very high level of NPAs would have first its deposit utilised to reduce the NPAs and if still there are NPAs left for fulfilment, then they have to file for bankruptcy. The proceedings would then have to be presided by FRC. Now, the major question is what would happen to the money being deposited? In the previous regime, Depositors Insurance Corporation insured deposit up to Rs.1 lakh per customer, but in the current context, this corporation would be closed and FRC would take control which means that FRC would decide how much to give to the depositors which is also creating panic amongst the stakeholders. Moreover, the amount of insurance which has not been decided has added further salt to the injury.

Has the Bill any answer to the problem been suggested? The primary work for the FRC is to classify the firms in five categories according to the risk of failure which are primarily: low, moderate, material, imminent and critical risk. The evaluation would be done on the parameters such as asset quality, CAR, assets and liabilities so on. If the financial firm is classified as “material” or “imminent” then the firm would be provided some time for recovering from the situation.

If the firm is classified as “critical” in that case, the administration would be taken and help the bank resolve the crisis by one of the five methods. First, it can transfer assets and liabilities to another firm. Second, it has the old resort to have a stronger bank to acquire it. Third, it can create a SPV for the transfer of assets and liabilities. Fourth, use the bail-in provision. Fifth, it can liquidate the firm.

In the current framework, only banks lenders are being protected in case of insolvency, but not all financial firms are covered. In this new bill, all the financial firms apart from banks such as NBFCs, insurance companies, stock exchanges, depositories and pension funds are also included. So, one can understand that the bill has just added a resort and stated that liquidation would be the last resort in which there would be a bail-in clause. The bail-in clause is just an addition to the existing frame work of consolidation of bank. Moreover, in advanced countries like US and Europe, there are laws which protect lenders money in case of bankruptcy of financial firms. But, since common people deposit money in the bank accounts they need to thoroughly understand this act. The existing government should make the people understand this Act and give them the assurance that their deposits are safe in the banks.

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