Financial Resolution and Deposit Insurance (FRDI) Bill

What Is the Purpose of the FRDI Bill?

The bill seeks to create a Resolution Authority. This body will handle failures of financial institutions like banks, NBFCs, and insurance firms. Its goal is to resolve crises quickly and reduce economic disruptions.

The bill will work with current regulators, including RBI, SEBI, IRDAI, and PFRDA. It aims to provide a clear process for managing defaults or collapses. This approach avoids complete reliance on taxpayer-funded bailouts.

Key Components of the FRDI Bill

• Resolution Authority: A specialised body with the power to restructure, merge, sell, or close failing financial institutions

• Deposit Insurance: Proposes to maintain or improve existing coverage, currently set at ₹5 lakh per depositor

• Bail-in Clause: Allows use of uninsured deposit amounts to recapitalise a failing institution, but only with the depositor’s prior consent

Example

If a bank collapses and you have ₹10 lakh deposited, only ₹5 lakh is protected under current insurance norms. The remaining ₹5 lakh could potentially be converted into equity or written down if you had consented to this risk while making the deposit. The aim is to avoid using public funds while ensuring that systemic failure does not spread.

Benefits of the FRDI Bill

• Orderly Resolution: Helps manage the failure of financial firms through a well-defined process

• Systemic Stability: Limits the risk of panic in the financial system by responding early and decisively

• Depositor Confidence: Strengthens insurance mechanisms to reassure savers

Challenges and Public Concerns

• Bail-in Provision: Remains controversial, as it could impact depositors beyond insured limits

• Clarity Needed: Many fear that the bill could erode trust in banks unless it clearly protects retail depositors

• Implementation Complexity: Requires coordination among multiple regulators and changes to existing laws

Conclusion

The FRDI Bill could be vital for India’s financial stability if reintroduced with proper safeguards. Depositors should note that insured deposits are protected. Any extra risk would only arise with informed consent. As discussions progress, it’s important to stay informed about how these changes might impact personal savings and investments in banks.