Details of FRDI bill (Check video below)
1. It is similar to the Insolvency and Bankruptcy Code (IBC), 2016. IBC was enacted to deal with situation when companies go bankrupt or insolvent.
2. FRDI Bill deals only with the companies that are in the financial sector*, while IBC deals with companies in all other sectors.
* (Financial firms include banks, insurance companies, and stock exchanges, among others. These firms accept deposits from consumers, channel these deposits into investments, provide loans, and manage payment systems that facilitate transactions in the country)
3. FRDI will provide a comprehensive resolution framework to deal with bankruptcy situations in financial sector entities such as banks and insurance companies.
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Highlights of FRDI bill
Resolution Corporation (RC) in FRDI bill
WHY RC is required
i. Currently, there is no specialized law for the resolution of financial firms in India.
ii. Provisions to resolve failure of financial firms are found scattered across different laws as elaborated below
iii. Resolution or winding up of firms is managed by the regulators for various kinds of financial firms (i.e. the Reserve Bank of India (RBI) for banks, the Insurance Regulatory and Development Authority (IRDA) for insurance companies, and the Securities and Exchange Board of India (SEBI) for stock exchanges.)
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RC Functions
i. To monitor financial firms, anticipate risk of failure,
ii. Take corrective action, and resolve them in case of such failure.
iii. The Corporation will also provide deposit insurance up to a certain limit, in case of bank failure. ( will replace the present insurance on deposit of up to Rs 1 lakh by Deposit Insurance and Credit Guarantee)
RC Members
Representatives from all financial sector regulators and the ministry of finance, among others.
HOW RC prevent failure
1. Risk based classification: Risk Based Classification based on their risk of failure.
i) Low (ii) Moderate (iii) Material (iv) Imminent (iv) Critical
The Resolution Corporation or the regulators (such as the RBI for banks, IRDA for insurance companies or SEBI for the stock exchanges) will classify financial firms under five categories, based on their risk of failure.
This classification will be based on adequacy of capital, assets and liabilities, and capability of management, among other criteria.
2. Corrective Action: Just as PCA framework, Resolution Corporation or regulators may direct the firms to take certain corrective action. For example, if the firm is at a higher risk to failure (under ‘material’ or ‘imminent’ categories), the Resolution Corporation or the regulator may: (i) prevent it from accepting deposits from consumers, (ii) prohibit the firm from acquiring other businesses, or (iii) require it to increase its capital.
Further, these firms will formulate resolution and restoration plans to prepare a strategy for improving their financial position and resolving the firm in case it fails.
3. The Resolution Corporation will take over the management of a financial firm once it is classified as ‘critical’. It will resolve the firm within one year (may be extended by another year). During this period, the firm will be immune against all legal actions (just as in IBC there was moratorium period of 180/270 days).
Resolution may be undertaken using methods including:
i. Merger or acquisition
ii. Transferring the assets, liabilities and management to a temporary firm
iii. Creating a bridge financial firm (where a new company is created to take over the assets, liabilities and management of the failing firm),
iv. Bail-in (internally transferring or converting the debt of the firm)
v. Liquidation: If resolution is not completed within a maximum period of two years, the firm will be liquidated.
Bail-in Provision
1. Financial firm on the verge of failure to be rescued by internally restructuring its debt.
2. Contrary to Bail-in under bail-out funds are infused by external sources to resolve a firm. This includes a failing firm being rescued by the government.
3.. Internally restructure the firm’s debt by:
i. cancelling liabilities ( which is saving deposit in case of banks) that the firm owes to its creditors, or
ii. Converting its liabilities into any other instrument (e.g., converting debt into equity), among other.
Present case related to Deposit insurance
i. In case any banks fails amounts up to one lakh rupees of deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
ii. In the absence of the bank having sufficient resources to repay deposits above this amount, depositors will lose their money.
iii. The DICGC Act, 1961 originally insured deposits up to Rs 1,500 and permitted the DICGC to increase this amount with the approval of the central government.
iv. The current insured amount of one lakh rupees was fixed in May 1993.
v. The Bill has a similar provision which allows the Resolution Corporation to set the insured amount in consultation with the RBI.
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