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Banking and Insurance January 9, 2018

Is FRDI Bill Really Draconian, No We Say

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The sudden withdrawal of high-value currency notes, popularly dubbed as demonetisation, sent shockwaves across the country, and even beyond, with non-resident Indians worried about their holdings. Ever since, social media has become breeding ground for rumors on how the government would next introduce anti-people reforms that would impact finances of the general populace. In the same context, news about the reduced printing of 2000-denomination notes was altered on social media messages to fuel gossips and rumorsoflooming withdrawal of these notes.

The article hasn’t mentioned the FRDI Bill yet, but the preceding para can be an indicative of what we intent to mention in subsequent paras.

The government will introduce the Financial Resolution and Deposit Insurance (FRDI) Bill in the coming days and the bill, even prior to becoming an Act has become the bone of contention between deposit holders in banks and the current dispensation. Since internet penetration is much deeper than financial literacy, manipulated and ill-construed provisions of the bill have spread like wildfire, and many are decrying losing their hard-earned money to banks.

The most talked-about provision is the bail-in option (can be construed as the exact opposite of bail-out where government comes to the rescue of ailing financial institutions). It is being talked about that fixed deposits and balances in savings accounts with banks are set to be vulnerable to be used for keeping a loss-making banking institution afloat. But is that truly the case?

Also read: How To Tackle Banking Sector Woes

Bail-in indeed refers to the act of using internal funds (in this case the holdings of depositors) to overcome turbulent times. While bail-outs are one where government uses its budgetary revenues to infuse capital in banks that have non-performing assets, they still appear as people-friendly measures since the common man doesn’t bother to realise that even government revenues come from taxes that are levied on us; any infusion of capital thus is a cut in spending on infrastructure expansion and other crucial services such as healthcare and education.

Coming back to FRDI Bill, it seeks the establishment of a resolution corporation that would oversee corrective actions in case of troubles in not only banks but also other financial sector firms like insurance companies. From mergers and acquisitions (Also read: Indian Bank’s Merger – A Good Idea?) to cutting down on administrative costs, the resolution corporation can introduce sweeping reforms to reverse the fortunes of the entity, and it can be said that this framework for timely and well-documented intervention was much-needed.

As far as depositors’ concerns are related, any holdings in banking institutions are guaranteed upto INR 1 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a subsidiary of the central bank. This is set to change after the passage of FRDI Act (but not to the disadvantage of depositors) as DICGC will be dissolved and the new resolution corporation will manage insurance of depositors’ money in savings accounts and fixed deposits. Final provisions ofthe bill are yet to come out, and the Finance Minister has re-assured on the security of deposits.

Finally, here is what you wish to hear. Yes, a certain portion (even higher than current) of depositor’s money with banks will be insured, and bail-in will not be the sole resolution tool. Bail-outs by the government and other interventions like from RBI will still be in place. Also, never forget banks are the backbone of the economy, and any instance of depositors losing faith in this sector will only triggerturbulent times for any nation, and the government will never let this happen.

Disclaimer – The views or opinions expressed in the article are the personal opinions of the author and do not in any way reflect the views of Suvipra. Suvipra does not assume any responsibility or liability for the same.

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One response to “Is FRDI Bill Really Draconian, No We Say”

  1. B K Singh says:

    A recent survey showed that government has to increase the limit by more than 12 times to cover 90% deposit

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