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FRDI Bill (Financial Resolution and Deposit Insurance Bill, 2017)

Objectives:
• Key objective of the FRDI Bill is to ensure an early recognition of a financial firm, regulated by RBI, SEBI, IRDA, PFRDA or any other authority as may be notified by the Central Government, which are in financial distress and thus to provide a resolution mechanism to minimize the impact of such financial trouble on the depositors and entire economy of the country.
• To inculcate discipline among financial service providers in the event of financial crises, by limiting the use of public money to bail out distressed entities.
• To strengthen and streamline the current framework of deposit insurance for the benefit of retail depositors.
• It seeks to decrease the time and costs involved in resolving distressed financial entities.

Features of the Bill:

• Establishment of Resolution Corporation:
1. The Bill establishes a Resolution Corporation to monitor financial firms, anticipate risk of failure, take corrective action, and resolve them in case of such failure.
2. The Corporation will also provide deposit insurance up to a certain limit, in case of bank failure.
3. The Resolution Corporation or the appropriate financial sector regulator may classify financial firms under five categories, based on their risk of failure. These categories in the order of increasing risk are:
a) Low: Probability of failure is substantially below acceptable levels
b) Moderate: Probability of failure is Marginally below acceptable levels
c) Material: Probability of failure is Above acceptable levels
d) Imminent: Probability of failure is Substantially above acceptable levels
e) Critical: Service providers on the verge of failure
4. The Resolution Corporation will take over the management of a financial firm once it is classified as ‘critical’. It will resolve the firm within one year (may be extended by another year).

• Resolution may be undertaken using methods including:

a) Merger or acquisition.
b) Transferring the assets, liabilities and management to a temporary firm.
c) Liquidation.
1. If resolution is not completed within a maximum period of two years, the firm will be liquidated. The Bill also specifies the order of distributing liquidation proceeds.
• Covered Service Provider:
1. The Bill provides for the resolution of covered service provider as listed in the Schedule 2 of the FRDI Bill.
2. Under the Bill, the powers and functions of the Resolution Corporation are applicable to covered service provider. Such covered service providers, among others, include any banking institution, any insurance company, any other financial service provider excluding individuals and partnership firms, Indian branches of foreign banks etc.

• Systemically Important Financial Institutions ("SIFIs"):
1. The Bill provides for designation of certain categories of financial institutions as SIFls by the Central Government.
2. Such designated financial institutions may or may not be a covered service provider and once designated all the provisions of the Act will be applicable to them.

• Time limit on Resolution:
1. The Bill provides that any process of resolution of a covered service provider shall be completed within a period of two years from the date on which such entity is classified to be at critical risk to viability.
2. However, such period of two years may be extended for up to one year.
• Consolidation of existing laws relating to resolution of certain categories of financial institutions:
1. The Bill proposes to consolidate the existing laws relating to resolution of certain categories of financial institutions, including banks, insurance companies, financial market infrastructures, payment systems, and other financial service providers into a single legislation.

• Repeal of Deposit Insurance and Credit Guarantee Corporation ('DICGC') Act, 1961:
1. The Bill provides for repeal of DICGC Act, 1961 in the manner as provided in the Bill.
2. Post enactment of the FRDI Bill, the DICGC shall stand dissolved and all its functions will be carried out by the Resolution Corporation.
• Cross Border Resolution:
1. The Bill provides for enforcement of resolution in a foreign country in case there is an agreement to this effect between the Indian government and such foreign country and its regulators.

The Bill would help in maintaining financial stability in the economy by ensuring adequate preventive measures, while at the same time providing the necessary instruments for dealing with crisis events.

Practice questions:

1.  Which of the following statements are true regarding FRDI Bill, 2017?

1. Under it, the powers and functions of the Resolution Corporation are applicable to covered service providers.
2. It provides for designation of certain categories of financial institutions as Systemically Important Financial Institutions by the central government.
3. It provides for enforcement of the resolution in the foreign country.

Codes:

A. 1 and 2

B. 2 and 3

C. 1 and 3

D. All.

Answer: d

2.  Which of the following statements are not true regarding Resolution Corporation?

1. It aims to monitor financial firms, anticipate risk of failure, take corrective action, and resolve them in case of such failure.
2. It will take over management of the financial firm once it is classified as ‘Imminent’.
3. It will resolve the firms within maximum period of one year.
4. If the resolution corporation will not able to complete the resolution within the specified maximum period then there will be transfer of firm to temporary firm.

Codes:

A. 1, 2 and 3

B. 2, 3 and 4

C. 1, 3 and 4

D. All.

Answer: b

 

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