What is FRDI Bill?

How does it protect

your bank-deposits?
13 Dec 2017 | By Ramya Patelkhana

Most of us have bank accounts, but the funds held in these savings accounts aren't really safe if the
banks fail.
To protect bank deposits, the Centre is going to introduce a new bill -Financial Resolution and
Deposit Insurance (FRDI) bill- in the Parliament in the upcoming winter session.
FRDI Bill covers financial institutions like banks, insurance companies, stock exchanges, etc.
Here's more.
In context: The Financial Resolution and Deposit Insurance Bill

13 Dec 2017What is FRDI Bill? How does it protect your bank-deposits?

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Why?Why do we need a special law for financial firms?

When a financial institution fails, investors/depositors suffer losses. For
instance, if an automaker fails, the public wouldn't really be affected except for
the fact that there would be reduced choices; there wouldn't be any negative
financial implications on the public.
But if a bank/insurance provider fails, the public (depositors/investors) lose
their money.
That's why there should be different rules for such financial firms.

What?What does the FRDI Bill aim to do?

The FRDI Bill is aimed at introducing an "early warning system" for financial
institutions to protect customers, as well as constituting the Resolution
Corporation (RC) to insure bank deposits.
Currently, the Deposit Insurance and Credit Guarantee Corporation (DICGC)
also insures bank deposits amounting to Rs. 1lakh.
The limit for insured deposit sum under the Resolution Corporation would be
set after consulting RBI.

Risk of FailureFive categories based on firms' failure risk

The Bill also aims to put in place the rules for classifying financial firms into
five categories -low, moderate, material, imminent, and critical risk to viability-
depending on their risk of failure.
For firms with material/imminent failure risk, there is a process to give them
time to recover; for companies in the terminal-stage, a method for allowing it
to prepare for failure is available.

Five MethodsWays to resolve crisis at "critical" risk firms

If a financial firm has "critical" failure risk, the RC takes over its administration.
The RC can use one or more of its five ways to resolve the crisis, including:
transferring its assets/liabilities to another firm; merging or putting it up for
acquisition; creating a bridge financial firm for taking over the failing firm's
assets/liabilities/management; using bail-in provision/converting the debt; and
liquidating the firm.

Bail-in toolWhat is the bail-in clause?

Bail-in rescues financial institutions on the "brink of failure" by making
creditors/depositors take losses on their holdings.
The bill's bail-in clause triggered panic among bank depositors that their
money would be used to reduce banks' liabilities.
However, customers need not worry about their deposits being lost in a bail-
in. They would be lost only if the depositors give their consent for the same.
ApproachA depositor-friendly and rule of law based approach
It is essential for the customers of financial firms to understand that bail-in
clause is only one of the five methods the RC would use for "critical" failure
risk.
If there's a robust system in place, very few financial institutions will reach the
"critical" stage.
So, the FRDI Bill's approach is actually safe and better than having "an ad hoc
personality-driven approach".

Failure?Public sector banks got recapitalized recently to prevent failure

Depositors may not lose their holdings even if the FRDI Act comes into force,
as the option to prevent bank failure through bail-in would reportedly remain
with the government.
It finally depends on the government; but, it is unlikely for any government to
allow depositors to suffer losses due to bank's failure, even if their deposit
sum is beyond the insured limit.

 The Budget session of Parliament may begin on January 30 with President addressing the Joint
Session of both the Houses of Parliament, a senior govt official said.
 The official said that the Economic Survey is likely to be tabled on January 31 and the Union
Budget may be presented the following day

NEW DELHI: Finance Minister Arun Jaitley is likely to present India's first post-GST and the current
government's last full Budget on February 1 next year.

Scrapping the colonial-era tradition of presenting the Budget at the end of February, Jaitley had for the
first time presented the annual accounts on February 1 this year

Scrapping the colonial-era tradition of presenting the Budget at the end of February, Jaitley had for the
first time presented the annual accounts on February 1 this year

This will be Jaitley's 5th Budget in a row.

With the preponement of Budget, ministries are now allocated their budgeted funds from the start of
the financial year beginning April. This gives government departments more leeway to spend as well as
allow companies time to adapt to business and taxation plans.
Previously, when the Budget was presented at the end of February, the three-stage Parliament approval
process used to get completed some time in mid-May, weeks ahead of onset of monsoon rains. This
meant government departments would start spending on projects only from August-end or September,
after the monsoon season ended.

Besides advancing the presentation date, the Budget scrapped the Plan and non-Plan distinction as well.