Financial Resolution and Deposit Insurance (FRDI) bill and Common peoples of India                                                                      (Dr. Kanwar Singh)

Few weeks back everyone was scared by the flashing newsfeeds about withdrawal of Deposit Insurance and Credit Guarantee Corporation (DICGC). DICGC is a subsidiary of Reserve Bank of India, came into existence for the purpose of providing insurance of deposits and guaranteeing of credit facilities to the band depositors.

The concept of insuring deposits kept with banks received attention for the first time in the year 1948 by the Reserve Bank of India after the banking crises in Bengal. Subsequently, in the year 1950, the Rural Banking Enquiry Committee also supported the concept. Serious thought to the concept was, however, given by the Reserve Bank of India and the Central Government after the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in 1960. The Deposit Insurance Corporation (DIC) Bill was introduced on August 21, 1961. After it was passed by the Parliament, the Bill got the assent of the President on December 7, 1961 and the Deposit Insurance Act, 1961 came into force on January 1, 1962.  The Deposit Insurance Scheme was initially extended to functioning commercial banks only. This included the State Bank of India and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India.  Later on in 1968, co-operative banks were also brought under this insurance scheme under the Deposit Insurance Corporation (Amendment) Act, 1968.

DICGC insures all bank deposits, such as saving, fixed, current, Recurring deposit for up to the limit of Rs. 100,000 of each deposits in a bank.   A maximum of Rs 1,00,000 is insured for each user for both principal and interest amount. If the customer has accounts in different banks, all of those accounts are insured to a maximum of Rs 1,00,000. However, if there are more accounts in same bank, all of those are treated as a single account. The insurance premium is paid by the insured banks itself. This means that the benefit of deposit insurance protection is made available to the depositors or customers of banks free of cost. The Corporation has the power to cancel the registration of an insured bank if it fails to pay the premium for three consecutive half-year periods. The Corporation may restore the registration of the bank, which has been de-registered for non-payment of premium, if the concerned bank makes a request in this behalf and pays all the amounts due by way of premium from the date of default together with interest.

Now let’s have a outlook on new Financial Resolution and Deposit Insurance (FRDI) bill which has become the talk of the town. The FRDI bill  aims to set up a resolution corporation which will monitor financial companies, categorise them as per their risk profiles as low, moderate, material, imminent or critical,  and step in to prevent them from going bankrupts by writing down their liabilities. In firms where the risk factor is critical, the corporation can take over the firm’s operations and decide on merger or acquisition, transferring the assets and liabilities to another firm, or liquidation. The fear stems from the bill's bail-in clause which empowers the resolution corporation to rescue a failing financial institution through the help of creditors and depositors money. Bail-in is, however, one of the many options to rescue a financial institution on the brink of failure. Barring money which is insured, rest of the money can be subjected to bail-in clause. However, there is concern about how the depositors of a bank with a critical risk factor will be repaid, as there is no such minimum insured amount in this bill as it is earlier, according to experts depositor’s money will be put in long term investments but how can investment done in a bankrupt company will benefit customer that is thinking practically depositor will not be getting anything practically.

So today it is difficult to judge if this will be beneficial to depositors as Even today, only a small amount of Rs 1 lakh of bank deposits is insured in case of a bank going bankrupt. So for today the one who have faith on government needs not to worry as the finance minster said in press conferences as well as in series of tweets that “objective of the government is to fully protect the interest of the financial institutions and depositors.”

A release by the Press Information Bureau said, “The provisions contained in the FRDI Bill, as introduced in the Parliament, do not modify present protections to the depositors adversely at all. Rather, they provide additional protections to the depositors in a more transparent manner.”  The bureau also said that the bill does not limit the government’s power to extend financial support to banks, including public sector banks. It added that the Bill will instead “strengthen the financial system by adding a comprehensive resolution regime that will help ensure that, in the rare event of failure of a financial service provider, there is a system of quick, orderly and efficient resolution in favour of depositors”

The Finance Ministry in a series of tweets earlier this week clarified that rights of depositors will not be compromised by the Financial Resolution and Deposit Insurance Bill, 2017, or FRDI Bill, expected to be tabled in the Parliament in the upcoming winter session. The ministry said that “besides providing similar protection /guarantee of Rs.1 lakh to depositors,as it exists today, the rights of uninsured depositors are being placed at an elevated status in the FRDI Bill compared to existing legal arrangements over the unsecured creditors and even Government dues.”