What is Financial Resolution and Deposit Insurance (FRDI) Bill and how does it impact Fixed Deposit Holders?
Recently, Govt of India has been taking steps forward to see that FRDI Bill (Financial Resolution and Deposit Insurance Bill) is passed and comes into effect in 2018. The new bill was planned to be tabled this winter session in Parliament, however expected to be placed during business plan session. Financial Resolution and Deposit Insurance Bill (FRDI Bill) has created a wave of great anxiety amongst the millions of FD depositors regarding the safety of their deposits in the bank. But, however, the common man is not aware of the clauses of this bill. What is FRDI Bill? How does it affects fixed deposit holders? What does experts say about this FRDI Bill? This article explains the controversial and arguing points of the bill.
Recent Government move about FRDI bill
The FRDI Bill was introduced in Lok Sabha during the Monsoon session on August 11, 2017. Currently, a Joint Committee of the two houses of Parliament is examining this bill. The committee will submit its report in the upcoming winter session in Dec 2017.
What is Financial Resolution and Deposit Insurance (FRDI) Bill?
In simple terms, FRDI bill helps to establish Resolution Corporation which would monitor financial firms and banks and suggests corrective action. In this process it can implement “bail-in” process where bank fixed deposits would be used to recover from financial problems of such firms / banks.
The Corporation will also provide deposit insurance up to a certain limit, in case of bank failure. The Resolution Corporation will categorize the financial firms under five categories, based on their risk of failure. These categories are low, moderate, material, imminent and critical. The Resolution Corporation will take over the firms that fall under ‘Critical’ category and it will resolve the firm within one year. It may extend the limit if it requires.
What is Bail-in Clause in FRDI Bill?
The bill has been criticized for some of its controversial points including a ‘bail-in’ clause, which says that depositor money can be used by failing financial institutions to stay afloat.
Presently, the guarantee of the Deposit Insurance and Credit Guarantee Corporation (DICGC) can protect each depositor of banks up to a limit of Rs 1 Lakh. Remaining deposits, i.e. beyond Rs. 1 Lakh do not have any deposit protection guarantee and are treated at par with claims of unsecured creditors as of now.
Who would get affected with Financial Resolution and Deposit Insurance Bill (FRDI Bill)?
From the depositor’s point of view, the risk factor has not changed substantially. The bail-in clause will not apply to the deposits covered under insurance. However, the other millions of depositors not covered under insurance (beyond Rs 1 Lakh) and who have parked their funds for safety in the banks would get affected with FRDI Bill. The bill gives more teeth to the banks and regulators to use the depositor’s money and make good the losses suffered by way of loans that are never recovered from big borrowers.
Does this FRDI bill apply for all existing Fixed Deposits?
This FRDI bill would apply for all existing and new fixed deposits. It does not provide special safety for old or earlier fixed deposit schemes. Currently there are 67% of the total fixed deposits less than Rs 1 Lakh and 33% of total FDs above Rs 1 Lakh in India. Term deposits above Rs 15 Lakhs constitutes to 1.3% of total FDs.
Positive Points in FRDI Bill
1) FRDI bill helps to establish credit resolution wing which can help in monitoring financial firms or banks
2) Credit Resolution can increase the existing fixed deposit insurance amount of Rs 1 Lakh limit which was decided 25 years back. This would increase safety to fixed deposit holders.
3) Statutory bail-in helps Credit Resolution to take control of firm without taking consent from depositors or creditors of the firm.
4) FRDI bill can avoid cases like financial crisis happened with collapse of Lehman Bros in US in 2017. This bill is good for Indian economy which would strengthen banking and financial sector.
Negative points in FRDI Bill
1) Fixed Deposit holders would be biggest looser if something happens to the bank. Their fixed deposits would be converted and used for bail-in without their consent.
2) Credit Resolution can change the deposit insurance amount which can be lower than current deposit insurance of Rs 1 Lakh. This depends on their decision.
What does experts say about FRDI Bill?
"The concerns about this bill are because the insurance amount is not specified," said Anil Gupta, vice-president at ICRA. "There are fears that deposits being liabilities will be written down in case of a default. However, these fears are not correct: In the previous regime, too, there was no guarantee for deposits, but no one lost out."
What should investors do in case FRDI bill passes?
In the history of 70 years of independent India, no public sector has gone bust. There are cases of many private sector banks and co-operative banks that have shut down although the Reserve Bank of India has intervened to merge banks that are on the verge of collapse with bigger banks (e.g. Global Trust Bank-GTB).
Despite the entry of several private banks in the country in the last two decades, a public sector bank is still seen as a safe avenue to park your deposits. This is one reason why public sector banks are preferred over private banks in spite of their low interest regime. Once FRDI is passed and we have clarity we can relook at the risks. If the deposit insurance amount is increased beyond Rs 1 Lakh, it would be welcome move. If there is no change in deposit insurance, the safest way to invest your FDs would be in public sector banks. However, such banks can take advantage of this FRDI bill and can reduce the FD interest considering the safety of your FDs.
One may also look at better investment options like investing in government bonds, post office saving schemes which are zero risk. One may also check about debt mutual funds which can provide higher returns, however there is element of risk.
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What is Financial Resolution and Deposit Insurance (FRDI) Bill and how does it impact Fixed Deposit Holders