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FRDI: Why the bail-in clause is unnecessary

By Vicky
|

Some provisions of the Financial Resolution and Deposit Insurance Bill 2017 also also known as the FRDI Bill have given rise to concerns about the safety of bank deposits.

FRDI: Why the bail-in clause is unnecessary

The government has clarified that the deposits are safe and the matter is still before a high level committee. The bail in clause in particular is what has worried the people. To put it in a simplified way, the people say that in case their bank fails, they will lose their deposits.

The Bill specifies various tools to resolve a failing financial firm which include transferring its assets and liabilities, merging it with another firm, or liquidating it. One of these methods allows for a financial firm on the verge of failure to be rescued by internally restructuring its debt. This method is known as bail-in.

Under bail-in, the Resolution Corporation can internally restructure the firm's debt by: (i) cancelling liabilities that the firm owes to its creditors, or (ii) converting its liabilities into any other instrument (e.g., converting debt into equity), among others, an article in the prsindia stated.

Bail-in may be used in cases where it is necessary to continue the services of the firm, but the option of selling it is not feasible.[4] This method allows for losses to be absorbed and consequently enables the firm to carry on business for a reasonable time period while maintaining market confidence.3 The Bill allows the Resolution Corporation to either resolve a firm by only using bail-in, or use bail-in as part of a

After the global financial crisis in 2008, several countries such as the US and those across Europe developed specialised resolution capabilities. This was aimed at preventing another crisis and sought to strengthen mechanisms for monitoring and resolving sick financial firms.

The Financial Stability Board, an international body comprising G20 countries (including India), recommended that countries should allow resolution of firms by bail-in under their jurisdiction. The European Union also issued a directive proposing a structure for member countries to follow while framing their respective resolution laws. This directive suggested that countries should include bail-in among their resolution tools. Countries such as UK and Germany have provided for bail-in under their laws. However, this method has rarely been used. One of the rare instances was in 2013, when bail-in was used to resolve a bank in Cyprus.

Professor R Vaidyanathan from the Indian Institute of Management Bangalore says that the bail in clause was unnecessary. In case it goes through it will not cover the deposits of individuals. As of today only Rs 1 lakh is protected through insurance.

FRDI: 'Do not panic, your money is safe, stop fear mongering', says Fin Min

There are European nations with this clause. But my question is why have it at all. It is not a finality and the entire issue is before a committee. We are hopeful that all measures to protect the depositor's interests are taken care of. However I also feel that no institution can take away one's hard earned money. Over all an unwanted clause to add, Professor Vaidyanathan also adds.

Government clarification:

The Ministry of Finance has repeatedly asked people not to believe such rumours. It has asked people to be beware of fake propaganda. Beware of fear mongering, the ministry also said. Further the ministry said that the government of India assures security of money deposited in the banks.

The government of India is strengthening the mechanism to protect depositors. The proposed FRDI Bill is now before a joint committee and the act in this regard is yet to be passed. The rights of the depositors will be fully protected at the time of the legislation and the banks are being strengthened by the infusion of over Rs 2 lakh crore, the ministry also said. Further the statement also read that the government is strengthening the rights of the depositors like never before and special care is being taken care of small depositors.

The bill does not propose to limit the scope of powers for the government to extend financing and resolution support to banks, including public sector banks. The provisions contained in the FRDI bill, as introduced in the Parliament, do not modify present protections to the depositors adversely at all. They provide additional protections to the depositors in a more transparent manner," the ministry also said.

The Finance Ministry however said that the Billis are depositor friendly when compared to other countries which provide for statutory bail-in without consent of creditors and depositors.

"Indian Banks have adequate capital and are also under prudent regulation and supervision to ensure safety and soundness, as well as systemic stability. The existing laws ensure the integrity, security and safety of the banking system," said the ministry.

"The bill ensures that, in the rare event of failure of a financial service provider, there is a system of quick, orderly and efficient resolution in favour of depositors," the Finance Ministry also added.

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