Background:

India presently does not have any integrated or comprehensive legal framework for resolution and liquidation of financial firms, however, the Financial Resolution and Deposit Insurance Bill, 2017 (hereinafter referred to as ‘FRDI bill’ or ‘the bill’) tabled in August, 2017, has been introduced to cater to the need for an integrated and comprehensive legal framework.

It seems to be favorable for a depositor in case of a bank failure because the resolution of bank is more favorable towards the depositor than the liquidation of the bank as depositors will get greater value in case of resolution of the bank than in case of the bank undergoing liquidation. FRDI Bill establishes a ‘Resolution Corporation’ and a ‘Comprehensive Resolution Regime’. The bill provides for a 5-stage health classification of financial firms as stated in the press release by the Department of Economic Affairs.[1]

The Bail-In Clause:

The Bail-in clause is when liability holders bear a part of the cost of resolution, by reduction in their own claims. It is one of the many tools introduced in the bill for resolution of financial institutions in times of financial crises. The bill seeks to transfer the deposit insurance function from the Deposit Insurance and Credit Guarantee Corporation to the Resolution Corporation, thus, further ensuring the protection of depositor’s rights.

Depositor’s rights:

The pre-existing protections to the rights of the depositor have not been modified, however, additions have been made thereof. The Resolution Corporation has been given the power to increase the insured deposit amount which is currently INR 1 lakh (USD 1569 approx.). As per the new bill, the claims of uninsured depositors in case of liquidation will be higher than before.

Safeguards taken for depositors:

  • The Government has ensured that the deposits which are insured will not be used in case of resolution of a financial institution.
  • The bail-in instrument will be subject to Government scrutiny and oversight of the Parliament.
  • Consent will be mandatorily obtained before utilizing the deposits of the depositor.
  • The resolution corporation has to ensure that all creditors get at least the value they would have received in case of liquidation of the bank, failing which the creditors can seek compensation from Resolution Corporation through an order of National Company Law Tribunal.

Conclusion: Keeping in view the vulnerability of our economy towards the profits and losses experienced by the financial institutions and absence of a consolidated and a complete law to support any adversity, which may befall such institutions there was an immediate need for introduction of a final complete legislation. Thus, this new bill is a hope for better banking mechanism in India which will now even extend its cover upon other financial institutions beyond the public sector bank. Moreover, this bill seeks to establish a strong banking sector in India ensuring maximum protection of the rights of the depositors.