Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 is similar to the Insolvency and Bankruptcy Code, 2016. FRDI deals only with the companies that are in the financial sector entities such as banks and insurance companies etc. The insolvency code Act deals with companies in all other sectors (Non-financial institutions). Purpose of the Bill is to create a resolution regime for financial institutions when they face crisis without creating financial burden for the tax payers.
“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 specialized 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.”
The Bill was referred to a Joint Committee of Parliament (Chair: Mr. Bhupender Yadav) on August 10, 2017.The committee consists of members from various regulators like RBI, SEBI, IRDA, PFRDA to submit a Bill on resolution of financial firms. The Committee submitted a draft Bill named as “The Financial Resolution and Deposit Insurance (FRDI) Bill”.
The Bill will apply to :-
a. Banks
b. Insurance Companies
c. Stock Exchanges
d. Depositories
e. Payment systems
f. Non-banking financial companies and their parent companies.
Objectives
The key objectives of this bill are as follows:
♦ It seeks to create a a frame work for resolving bankruptcy in financial firms such as banks and insurance companies and also aims to instill discipline in financial service providers in the event of a financial crisis by limiting the use of public money to bail out distressed entities.
♦ It also seeks to regulate financial service providers including banks except cooperative banks, insurance companies, financial market infrastructure, payment systems, and non-banking finance companies so as to comply with the emerging international norms for establishing effective resolution regime for financial sector.
Key Provisions
Some of the important provisions of the bill are as follows:
Resolution Corporation
The bill proposes that a Resolution Corporation will be established by Central Government as an independent regulator; and it will have a Chairperson and representatives from the Finance Ministry, RBI, and SEBI, among others. This would take over the task of resolution of failing financial firms from the Reserve Bank of India (RBI) and other regulators.
Risk based Classification
The Resolution Corporation is mandated to classify service providers based on their risk of failure by consulting with respective regulators like RBI for banks, and IRDA for insurance companies. Total four categories are proposed based on their risk of failure- Low, Moderate, Material, imminent and critical
- Low: Probability of failure is substantially below acceptable levels
- Moderate: Probability of failure is Marginally below acceptable levels
- Material: Probability of failure is Above acceptable levels
- Imminent- Probability of failure is Substantially above acceptable levels
- Critical: Service providers on the verge of failure
Time limit
When a service provider is classified as ‘critical’ the resolution process will be completed within a year from the date. This time limit may be extended by another year (i.e. maximum limit of two years).
If resolution of service provider is not completed during this time period then the service provider will be liquidated.
Conclusion
FRDI Bill 2017 provides for specialized resolution mechanism of certain categories of financial service providers and
establishment of Resolution Corporation which will contribute to the stability and resilience of the financial system. The following are the advantages of FRDI Bill 2017 to all stakeholders of various Financial Service Providers in
India.
♦ It can benefit a large number of retail depositors as it seeks to decrease the time and costs involved in resolving distressed financial entities.
♦ Help in maintaining financial stability in the economy by ensuring adequate preventive measures, as well as
provide necessary instruments in an event of crisis.
♦ Once implemented, the Bill together with the Code will provide a comprehensive resolution framework for the
economy.
♦ The bill envisages inculcating discipline among financial service providers in the event of financial crisis.
♦ It promotes “Ease of Doing Business” in the country.
♦ Improve financial inclusion and increase access to credit, which may lead to the reduction of the cost for obtaining credit.
♦ Increased access to finance enhances enterprise growth, which in turn leads to preserving employment, growth and the creation of new job opportunities.
♦ The FRDI Bill will be a win-win for all with all such suggested changes to make it more depositors friendly
