There is a lot of ambiguity in recent times over the safety of the fixed deposits, which happens to be the lifeline of the middle class. It is due to the new bill introduced by the government in the winter session called the Financial Resolution and Deposit Insurance Bill (FRDI), this bill, if passed will come into effect in the current year 2018. The anticipation of this bill has resulted in a wave of anxiety, especially amongst people with heavy fixed deposits. FRDI is the new institutional framework designed to deal with bankruptcies in banks.
Let us read on to understand the clauses and impact of the FRDI bill on the banks and depositors.
What is FRDI Bill? To quickly understand, this bill when commissioned will help to establish a Resolution Corporation, which will be responsible for monitoring the banks and financial firms, by suggesting corrective action. Under this process, the resolution corporation has the right to implement the ‘Bail-in’ process. Under which the bank or the firm’s own fixed deposits will be used to recover from the financial problems faced by them. Having said this, it is only fair that the corporation provides insurance over the deposit, up to a certain limit in an event of bankruptcy.
It is this bail-in feature of the FRDI bill that is causing the stir amongst people who are criticizing the clause. Mainly because it is the depositor’s money that can be used by the drowning financial institution to stay afloat. In their defence, this is not a very common scenario.
At the moment, the good news is that the Deposit Insurance and Credit Guarantee Corporation (DICGC) is eligible to protect each depositor of the bank for up to a limit of one Lakh. Any amount above that does not cover the guarantee.
It is interesting to note that the resolution corporation will categorize financial firms under 5 categories, Low, Moderate, Material, Imminent and Critical, and will take over the firms which fall under the ‘Critical; category to resolve its issue in a year, extensions might be requested under certain requirements.
Who will get impacted by this bill? prima facie it does look like the investor who does not qualify under the insurance clause, the ones who have parked their funds for security purposes with the banks and financial firms will get impacted the most. The current bill supports the banks more than the depositors, as it allows them to amend the losses suffered by the financial institutions by way of loans which are never recovered by big borrowers.
The bill also impacts all the fixed deposits and not only the new ones made after the bill is passed.
Some Positives of the FRDI bill would be the fact that establishes credit resolution by monitoring financial firms and banks. This could perhaps have an impact on the current fixed deposit insurance amount which is one lakh, further increasing safety for the customers. FRDI can avoid past scenarios like the fall of Lehman Bros in the US.
Points to Ponder about FRDI is that the depositor might be the biggest loser in an event the firm declares bankruptcy. As the fixed deposit can be converted to be used as Bail-in, without the consent of the customer.
The good news is that the government’s objective is to fully protect the interest of financial institutions and the depositors. With this intent, it is only a game of wait and watches to see what the standing committee decides and the financial limit on which the insurance is set for the Bail-in clause.