FRDI Bill - Central Govt Has Brought A Bill Which Gives Bank Rights Over Your Deposited Money
Shilpi Thakur 8 Dec 2017

FRDI Bill - Central Govt Has Brought A Bill Which Gives Bank Rights Over Your Deposited Money

The Union government has brought about a proposal for a Financial Resolution and Deposit Insurance(FRDI) Bill, which is a part of a host of banking reforms and enactment of laws that aim to resolve the conditions of the failing banks. The Bill has been the cause of worry for depositors across the country.

Banks has always been associated with financial security. It is the trust of the depositors in the bank that helps the banking institution to run easily. What if the bank’s financial situation deteriorates to an extent that it becomes unable to repay the deposits, then to whom will they turn to?

To deal with situation, way back in 1961 the Deposit Insurance and Credit Guarantee Corporation Act was passed by the Indian Parliament.

The law guarantees the deposits would be under the insurance cover for up to Rs 1 lakh, including interest. This means that the payment of all deposits up to Rs 1 lakh are protected even if the bank collapse. But anything over and above Rs 1 lakh does not have this protection. So, if the bank scuttles, a bank account holder with a large deposit might lose a lot of money.

21 public sector banks control 82% of the banking business in India, and they roughly pay about Rs 3,000 crores as insurance premium to the Deposit Insurance and Credit Guarantee Corporation, a subsidiary of the Reserve Bank of India. 

A different set up proposed by the government

Though, this framework is all set to witness a drastic change when the Parliament takes up the FRDI Bill, 2017, in Lok Sabha, possibly in the upcoming Winter Session. The FRDI bill, 2017 was tabled in the Lok Sabha in August this year following which it was referred for review to a joint parliamentary committee. The report by the committee is due to be submitted during this Winter Session, after which an amended Bill is expected to be tabled in the upcoming winter session of Parliament beginning 15 December.

The FRDI Bill seeks to resolve bankruptcy in a banking institution, insurance companies and other financial establishments.

Along with the Bankruptcy and Insolvency Code, re-capitalisation of PSU banks, and FDI in insurance this Bill is set to create a landmark in the financial sector. 

What is the issue?

The Bill is facing stiff opposition from the bank employees union and depositors as well. In August, banking employees went on a strike against the proposed legislation.

This bill is being opposed for a variety of reasons. In a joint statement, the union said that the proposed law would allow the public-sector banks for liquidation or amalgamation, which could put deposits of the customers under severe risk. Even worse, provisions dealing with deposit insurance are unclear in the draft law, and there is no explanation for the amount which has to be insuredby the banks.

A bail-in option is also provided in the bill, which means depositors could lose the control of their money, i.e. in case the bank’s financial situation deteriorates, deposits could be converted into securities such as shares in the bank. 

A breakdown of the clauses of the FRDI Bill

  • Closure of Deposit Insurance and Credit Guarantee Corporation (DICGC)

Although India never had such a resolution authority before, the Reserve Bank and the Insurance Regulatory and Development Authority of India (IRDAI), an autonomous,statutory agency regulated and promoted the insurance industries.Recently in the past, RBI had asked PSU banks to take over stressed banks to protect the depositors and its employees.

The Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, established in 1971 insures all kinds of bank deposits up to a limit of ₹1,00,000. In case a stressed bank had to be liquidated, the depositors would be paid through DICGC.

However, the proposed Bill seeks closure of the DICGC, as the credit guarantee will be taken care of by the Resolution Corporation itself.

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