Govt may junk FRDI Bill as bail-in clause makes depositors jittery: Report

The clause raised concerns among people who feared that they would have to lose their money deposited in banks in case of insolvency

In the wake of widespread criticism over the controversial 'bail-in' clause, the government has decided to drop the Financial Resolution and Deposit Insurance (FRDI) Bill, according to a newspaper report.

Sources said the decision to withdraw the FRDI Bill, 2017, was taken a day ahead of the July 14 protests planned by unions representing employees of banks and state-run insurance companies, The Indian Express reported on Wednesday. It said the Department of Economic Affairs had been instructed to prepare the withdrawal proposal for the Cabinet’s approval.

The “bail-in” clause in the Bill, introduced in August 2017, said that in case of insolvency in a bank, depositors will have to bear a part of the cost of the resolution by a corresponding reduction in their claims.

The clause raised concerns among people who feared that they would lose their money in banks. The government, however,  maintained that it will fully protect public deposits in financial institutions. It also affirmed that depositors will be given preferential treatment in the event of liquidation and the controversial bail-in clause will be used only with the prior consent of depositors.

In January, the Finance Ministry said in a statement that  "misgivings" expressed in the media, especially social media, on depositor protection were "entirely misplaced". 

"Bail-in provision may not be required to be used in case of any specific resolution. Most certainly, it will not be used in case of a public sector bank as such a contingency is not likely to arise," said the statement.

At present, deposits in banks are insured for a maximum of Rs 1 lakh by the Deposit Insurance and Credit Guarantee Corporation, an arm of the RBI. "The similar protection would continue under the FRDI Bill and the Resolution Corporation is empowered to increase the deposit insurance amount," the ministry said.

The provisions of the Bill had been opposed by trade unions. Many opposition parties, including Congress, termed it anti-people and anti-poor.

The FRDI Bill proposed to create a framework for overseeing financial institutions such as banks, insurance companies, non-banking financial services (NBFC) companies and stock exchanges in case of insolvency. If they failed, a quick solution was to either sell that firm, merge it with another firm or close it down, with the least disruption to the system and to investors and other stakeholders.

This was to be done through a new entity, a Financial Resolution Corporation, that would classify firms according to the risks they pose, carry out inspections and, at a later stage, take over control. This was recommended by the Financial Sector Legislative Reforms Commission (FSLRC) headed by Justice B N Srikrishna.