Financial Insights

Modified FRDI Bill in discussion to tackle insolvency of companies in financial sector

The government had initiated discussions to apply a resolution mechanism that will be able to effectively deal with the insolvency resolution of financial sector firms. A modified version of the of the Financial Resolution and Deposit Insurance (FRDI) Bill is currently being formed. This bill was introduced in 2018 but was subsequently withdrawn due to safety concerns of depositors’ money.

One of the major concerns of the FRDI was the ‘bail-in clause’ mentioned in the bill which stated that in case of insolvency of a bank, the depositors will have to bear a part of the cost of resolution leading to reduction in their claims. It was later clarified that such clause was not applicable on public banks & was kept as a last resort when merger and acquisition was not viable. The bill was withdrawn on a later date.

The Ministry of Finance has sought the views of the Reserve Bank of India regarding the formulation of legislations to establish a resolution mechanism that deals with the insolvency of financial firms and maintains safety of the depositors. There is a dire need for such a resolution in the financial sector since there is no framework for resolution of the insolvency of a public bank or certain other entities.

There exists a Prompt Corrective Action framework for resolving the insolvency of Non-Banking Financial Companies (NBFCs) but if a different entity which has significant impact on the financial system files for insolvency, they have to go through the Insolvency and Bankruptcy Code. A new law is crucial to efficiently resolve the insolvency of such firms to ensure stability in the financial system.

This action comes after the deposit insurance cover was raised. These actions are being undertaken to strengthen the depositors’ trust in the government. Recently, the RBI voluntarily appointed an additional director for RBL Bank and superseded the Board of Directors of Reliance Capital while citing governance issues.

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