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When the FRDI Bill Returns

When reintroduced, will the FRDI Bill address the issues of financial instability?

 

Following the recent meeting of the Financial Stability and Development Council (FSDC) held on 7 November 2019—that had the strengthening of the resolution framework of the financial sector of the country on its agenda—there is an emerging speculation about whether the current government will resurrect the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, particularly with reference to the banking sector. Recall that this government had revoked the bill within a year of its introduction in 2017, mainly due to the widespread scepticism about the “bail-in” clause in the bill, which allegedly can make the depositors of a failing financial institution share the burden of resolution cost by foregoing parts of their deposits with the institution. With household financial savings behaviour in India showing a skewed preference towards bank deposits in the last two decades, the security of these deposits is indeed a matter of significance.

As per media reports, the amendments to the FRDI Bill, 2017—now renamed the Financial Sector Development and Regulation (Resolution) Bill, 2019—are being worked out for three crucial issues: first, to increase the deposit insurance cover of customers; second, to iron out the contentious issues related to the bail-in clause; and third, to decide whether this resolution framework should apply to the public sector banks. At a time when the public sector banks have come under the stress of bad loans, increasing the deposit insurance coverage limit would be a welcome approach for reinforcing depositors’ confidence in the banking system in general, and the public sector banks in particular. Notwithstanding the argument about the “inclusiveness” or otherwise of the coverage limit of the deposit insurance scheme, a relevant approach of looking at these amendments, and so to say the resolution framework on the whole, is through the lens of systemic stability, especi­ally in the current scenario in the Indian banking sector.

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Updated On : 20th Jan, 2020

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