FRDI Bill’s bail-in clause unlikely to be watered down

The FRDI Bill is proposed as an early warning system for financial firms, under which the Resolution Corporation will classify firms based on their financial health and risk assessment.

The Centre is not considering any dilution of the bail-in clause in the contentious Financial Resolution and Deposit Insurance (FRDI) Bill. It will, however, add safeguards such as a list of liabilities that the Resolution Corporation (RC) will consider in case of a crisis in a financial firm, the finance ministry’s department of economic affairs has told a House panel, according to documents accessed by Hindustan Times.

The bail-in clause had triggered opposition to the FDRI Bill which was referred to a joint panel comprised of members from both the Lok Sabha and the Rajya Sabha in August 2017.(Raj K Raj/HT File Photo)

This bail-in clause has triggered opposition to the Bill. In August 2017, the bill was referred to a joint panel comprised of members from both the Lok Sabha and the Rajya Sabha. Amid widespread criticism, the panel got an extension till the end of the Budget session to submit its report.

The House panel wants to ensure that in case a financial firm is being revived with the bail-in clause, the RC does not have the powers to “cherry-pick” liabilities, further raising concerns over the common man’s bank deposits -- hence, the insistence by members of the panel on a formal list of liability classes from the government.

The department of economic affairs has agreed to list the liability classes but that will be done when regulations are formed after the Bill is passed by Parliament and becomes a law.

Why the Bill stirred a hornets’ nest

◼ Concerns about bail-in clause in the Bill caused controversy
◼ Bail-in clause allows use of internal resources for revival of sick financial firms
◼ But what these internal resources are has not been specified
◼ Fear is that fixed deposits of small investors could also be considered internal resources
◼ The House panel wants the government to list out these liabilities for better clarity
◼ The government is not likely to make such a list till the Bill has been passed

The Bill is proposed as an early warning system for financial firms, under which the RC will classify firms based on their financial health and risk assessment. If the risk of failure of a financial firm increases, the RC will have enough powers to prevent it.

But controversy has dogged the Bill over provisions that state that if a financial firm indeed fails, the bail-in option will kick in. Under this option, internal resources of the firm, including deposits, will be used to revive the company.

At a meeting of the panel on January 22 after it got an extension, the department of economic affairs gave a clause-by-clause explanation of the rationale and intent of the Bill, making it clear that the bail-in clause is here to stay.

The sections under Clause 52 of the FRDI Bill make it mandatory for financial firms to hold liabilities such as deposits, preferential shares, and bonds that can used if the bail-in clause is invoked. However, bank deposits are safe until and unless the RC specifies that they are a liability.

Experts said that even if the government draws up a list of liabilities of financial firms, bank deposits are likely to be ranked much below other classes of liabilities such as bonds, preferential shares etc.

“Apart from the extreme case of the bank crisis in Cyprus, bank deposits are the holy grail and seldom included for a bail-in,” said Kuntal Sur, partner and head of financial services risk at PwC India.

“We will know whether bank deposits will be touched only when we have the first case before the RC in India,” he added.