Financial Resolution and Deposit Insurance Bill

Source: The Economic Times

Why in News

Recently, the Finance Ministry has sought views of the Reserve Bank of India (RBI) on drafting a modified version of the Financial Resolution and Deposit Insurance (FRDI) Bill in order to deal with Insolvency of Firms in the financial sector.

In 2018, the Government had withdrawn the FRDI Bill 2017 amid concerns over the security of bank deposits.

Key Points

Background:

The FRDI Bill, 2017 was meant to address the issue of insolvency of firms in the financial sector.

If a bank, NBFC, an insurance company, a pension fund, or a mutual fund-run by an asset management company fails, a quick solution is available to either sell that firm, merge it with another firm, or close it down, with the least disruption to the system and other stakeholders.

It aimed to limit the fallout of the failure of institutions like banks, insurance companies, non-banking financial companies, pension funds, and stock exchanges.

The Bill was withdrawn due to concerns among the public over the safety of deposits despite assurances by the Central government.

A key point of criticism was the so-called bail-in clause in the Bill that said in case of insolvency in a bank, the depositors will have to bear a part of the cost of the resolution by a corresponding reduction in their claims.

About the New Bill:

The bill will provide for establishing a resolution authority, which would have powers to undertake prompt resolution for banks, insurance companies, and systemically important financial firms.

The legislation will also provide for insurance of up to Rs 5 lakh for bank depositors, which already has legal backing.

Need for legislative backing:

Even as the RBI has come out with a Prompt Corrective Action framework for NBFCs (Non-Banking Financial Companies), a need is being felt for legislative backing for the entire financial sector.

The current resolution regime is especially inappropriate for private-sector financial firms in the light of significant expansion and many of these acquiring systemically important status in India.

The provision of a single agency for the resolution of financial firms is in line with the recommendations made by the Financial Sector Legislative Reforms Commission (FSLRC), 2011 headed by Justice BN Srikrishna.

The Insolvency and Bankruptcy Code, 2021 along with the FRDI bill would have streamlined the procedure for the winding up or revival of an ailing financial sector firm.

Insolvency and Bankruptcy Code

It is a reform enacted in 2016. It amalgamates various laws relating to the insolvency resolution of business firms.

It lays down clear-cut and faster insolvency proceedings to help creditors, such as banks, recover dues and prevent bad loans, a key drag on the economy.

Key Words

Insolvency: It is a situation where individuals or companies are unable to repay their outstanding debt.

Bankruptcy: It is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability to pay off debts.