Financial Resolution and Deposit Insurance (FRDI) Bill

In News

• Recently, the government has started discussions to put in place a resolution mechanism to deal with insolvency of firms in the financial sector. 

About

• A modified version of the Financial Resolution and Deposit Insurance (FRDI) Bill —  which was withdrawn in 2018 due to its controversial provision of bail-in that was perceived as undermining  safety of depositors — is being contemplated. 
• The FRDI Bill, 2017 was meant to address the issue of insolvency of firms in the financial sector.
• If a bank, NBFC, an insurance company, a pension fund or a mutual fund-run by an asset management company fails, a quick solution is available to either sell that firm, merge it with another firm, or close it down, with the least disruption to the system and other stakeholders.
• It aimed to limit the fallout of the failure of institutions like banks, insurance companies, non-banking financial companies, pension funds and stock exchanges.
• The Bill was withdrawn due to concerns among the public over safety of deposits despite assurances by the Central government.

Image Courtesy: BS 

Revamped FRDI Bill

• The bill will provide for establishing a resolution authority, which would have powers to undertake prompt resolution for banks, insurance companies and systemically important financial firms.
• The legislation will also provide for an insurance of up to Rs 5 lakh for bank depositors, which already has a legal backing.

Need to redraft the bill 

• There is no resolution framework for banks and systemically important financial institutions. The routine insolvency process will not be able to handle it if a bank were to collapse.
• The provision of a single agency for resolution of financial firms is in line with the recommendations made by the Financial Sector Legislative Reforms Commission (FSLRC), 2011 headed by Justice B N Srikrishna.
• The Insolvency and Bankruptcy Code, 2021 along with the FRDI bill would have streamlined the procedure for the winding up or revival of an ailing financial sector firm.

Source: IE