Moneylife Exclusive - FRDI Bill To Come Back as FSDR: Many Questions Unanswered
The revised Financial Sector Development and Regulation (Resolution) Bill, 2019 (FSDR), is ready to be re-introduced in Parliament as soon as it is cleared by the Cabinet. The new Bill aims to fix the existing regime for resolution of financial firms, which is considered fragmented, incomplete and subject to multiple laws and regulatory authorities. 
 
We have had the opportunity to review a briefing note prepared by economic affairs secretary, Atanu Chakraborty, which provides the contours of the new Bill. It makes some astonishing assertions. 
 
The financial sector resolution framework covers a wide spectrum of financial entities including banks, insurance companies, financial market infrastructure, payment systems and other financial service-providers (excluding individuals and partnership firms) which are now scattered under different legislations. For the first time, it also covers cooperative banks and regional rural banks. 
 
This requires amendment to a bunch of statutes and also covers entities such as stock exchanges, clearing houses, depositories and other insurance and capital market intermediaries which are identified as systemically important financial institutions. 
 
India and a few other countries have yet to put in place ‘an effective resolution regime’. The new Bill expects to provide certain ‘critical powers’ for resolving banks, such as “power to terminate contracts, write down debt, modify liabilities or set up bridge institutions,” as well as a framework for resolving ‘cross-border’ (foreign) banks. 
 
The Bill will also provide clearly defined triggers for prompt corrective action (PCA) framework to bring a problem institution into resolution. It covers parent institutions as well as subsidiaries (a lesson learnt from Infrastructure Leasing & Financial Services—IL&FS—which was allowed to spawn over 347 subsidiaries and associates while the group holding company remained unlisted and out of the public eye).
 
An earlier version of the Bill, called the Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill), was introduced in the Lok Sabha on 10 August 2017 but withdrawn exactly a year later (for further comprehensive examination and reconsideration). It had triggered panic among depositors over the controversial ‘bail-in provision’ which held out the threat of forcibly converting term deposits with banks (above a certain insured threshold) into equity to recapitalise failed banks. 
 
Since the bad loans of banks had touched over Rs10 lakh crore and the late finance minister Arun Jaitley had announced the largest ever bailout (recapitalisation) of public sector banks (PSBs) of Rs2.11 lakh crore in October 2017, the blind panic was completely understandable. 
 
The new FSDR Bill, 2019, claims to cover a ‘systemic vacuum’ with regard to bankruptcy situations and will include the resolution of large non-banking finance institutions. The Bill takes into account situations arising out of giant institutions that failed, such as IL&FS and Dewan Housing Finance Ltd (DHFL). 
 
Resolution Authority (RA): The central part of the Bill is to set up a RA based in Mumbai. Its ambit will be “restricted to only orderly resolution and not to restoration and recovery.” It will have a representation of all financial sector regulators--Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance and Regulatory Development Authority of India (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA), the Central government and will have three whole-time members and two independent members. 
 
Structure: The RA will be self-sustaining and have three types of funds under it. One, the Resolution Authority Insurance Fund (replacing the Deposit Insurance and Credit Guarantee Authority Act, 1961) for deposit insurance. Two, the Resolution Authority Resolution Fund for covering resolution fees; and three, Resolution Authority General Fund for meeting RA’s administrative expenses. 
 
It will also collect fees from ‘specified service-providers’ (who are not defined and could be market intermediaries or institutions). The Central government will provide the final bit of funding, if required, when all other avenues have been exhausted. 
 
Each regulator will be tasked with creating a PCA framework for institutions under their ambit. The Resolution Fund, which will replace DICGC, will collect premiums based on ‘risk-based assessment’. However, if there is a systemic issue, a government bailout (to provide liquidity) is not ruled out.
 
The Bill aims to handle financial sector failures without transferring the burden to taxpayers by establishing a transparent mechanism to deal with such failures. 
 
The FSDR has removed the controversial ‘bail-in’ provision without eliminating the worries attached to it. It proposes that the RA is empowered to cancel or modify liabilities, subject to safeguards. This power will not apply to deposits covered by insurance. Secondly, while the deposit insurance cover will be increased, it is the RA that will decide the extent of increase and will also have the power to modify the deposit insurance limit. 
 
It is unclear how this will work in practice and whether the RA will announce the floor on a case-by-case basis after the need for resolution is triggered, especially since the insurance premium is based on risk-assessment.
 
Systemically Important Financial Institutions (SIFIs): Institutions whose failure may pose a risk to consumers and the overall financial stability of the country will be designated SIFIs by the Central government. Newly-designated SIFIs will be given a six-month transition period and can appeal against such a designation (which comes with greater regulatory oversight and disclosures) to the National Company Law Tribunal (NCLT).
 
The RA, along with sector regulators, will classify all service-providers into five categories, namely, low, moderate, material, imminent and critical. The classification will take into account several features of the specified service-providers, including adequacy of capital, asset quality, leverage ratio, liquidity and capability of management. 
 
The power of the RA to initiate action against the entity will depend on the classification. The powers of the RA come into play at the ‘material’ (when it can restrict certain activities), the ‘imminent’ and, finally, the ‘critical’ stage. At the ‘critical’ stage, a receiver will be appointed and payments as well as legal actions/contractual proceedings against the entity stayed as part of the resolution process. There are some checks and balances envisaged by circumscribing the powers of the RA.
 
Tools of Resolution: These include the use of one or more of the following: 1) transferring the whole or part of the assets and liabilities to another entity; 2) creating a bridge service-provider; 3) cancellation /modification of liabilities; 4) Merger or amalgamation; 5) Acquisition; 6) Liquidation; 7) Run-off, in case of an insurance company, if deemed appropriate.
 
Timeframe for Resolution: Resolution has to be completed in one year, with the provision for an extension of one additional year, except in the case of liquidation. 
 
Administratorship: When the resolution process kicks in, the RA will suspend the board and take over as the administrator. It is empowered to make executive decisions on behalf of the entity including appointment or removal of managers and act as a receiver. A decision on liquidation, however, has to be cleared by the NCLT, which will appoint the RA as liquidator. 
 
Interestingly, a service-provider wanting to close business will also have to make a written application to the RA who will decide on liquidation or resolution in consultation with the sector regulator. The RA can also recognise and enforce foreign resolution actions and has the option of refusing recognition and enforcement “in the interest of the financial stability of India, among other factors” including the right to protect local creditors. This would come into play for protection of Indian depositors in branches of foreign banks operating in India. 
 
Amendments to Other Statutes: For the FSDR to become operational, it envisages amendments to several statutes. These include: amendments to the Insolvency & Bankruptcy Act, The Companies Act 2013, Pension Fund Regulatory and Development Authority, Payment and Settlement Systems Act, the Multi-State Cooperative Societies Act, Reserve Bank of India Act, Insurance Act, National Housing Bank Act, Export-Import Bank of India Act, Banking Companies (Acquisition and Transfer of Undertaking) Act, the Central Goods and Services Tax Act, Regional Rural Banks Act, General Insurance Business (Nationalisation) Act, Income Tax Act, Customs Act, Securities Contracts Regulation Act, Life Insurance Corporation Act and State Bank of India Act, among others. 
 
Questionable Assertions 
While this is the structure and operational details of the Bill, the government’s note justifying its provisions makes several incongruous assertions going back to 1961 to justify some claims. 
 
For instance, it argues that the Indian experience of the past 50 years has been one of ‘forced mergers’ of PSBs which has imposed a huge cost on shareholders and the government in terms of recapitalisation support to transferee banks and poor recoveries. 
 
Clearly, a correct assessment ought to be post-1991, after India’s economic liberalisation led to the entry of new private banks, private insurance companies, the setting up of massive non-banking finance companies as well as private sector-professionally managed stock exchanges and depositories. 
 
Since then, there have been only two or three force-mergers, while the successful private sector banks, such as HDFC Bank, Kotak Bank and ICICI Bank, have acquired smaller banks, or they have been transformed after a change in management (RBL Bank). 
 
 

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    COMMENTS

    krahmany68

    7 months ago

    Very useful message madam.

    Is it applicable for Non Resident Indians (NRE accounts holders)?

    gopaliyer1950

    9 months ago

    It is very disappointing that instead of taking care of Depositor's interest Government seks to get this kind of draconion bill passed to shirk its responsibility of monitoring Commercial Banks. Once the bill comes to Parliament common man will loose full faith on banking system and avoid putting his hard earned monies as Deposits.

    In fact even before passibng of this bill the effect is already witnesed by way of ever reducing interest on bank deposits. For eg. SBI whihc has record NPA write off offers lowest interest rates on deposits.

    sdb.kraft

    1 year ago

    The subject matter was explained in a candid manner. I wish to get the updates further on this issue

    Samar Kishore

    1 year ago

    If the gurantee to the money deposited in the bank goes for six then nobody will deposit the money in the bank and rest assured that this economic system will collapse further . Had the govt introduced that after 1 lakh or sequentially up deposited amount will incr the deposit interest rates more people would have deposited the money in the bank.

    Find a solution when people save more money in the banks with sufficient security deposit to their cashwealth.

    Warna ANTICAA ANTINPR type nonsense tp kaafi chal rahe hain ...koi economy par bhi discussion karwa loo ki kaise improve ki jaaye...


    PAKISTAN
    ANTI CAA
    ANTI NPR

    KE alawa news channel ke paas kuch hai toh nahi...bcz desh ke majority youth ka takeoff level kaafi kam hai....isliye koi ye sab dekhta nahi hai..

    REPLY

    K V RAO

    In Reply to Samar Kishore 1 year ago

    The Hindi part of your feedback I didn't follow. Please translate.

    Meenal Mamdani

    1 year ago

    If all that Ms Dalal objects to are the questionable assertions, then I assume she finds the rest of the provisions of this Bill are acceptable.

    Most people including yours truly are not financially savvy enough to understand the good or bad points of this Bill. ML Foundation has built up enormous trust and goodwill among the public for financial probity and determination to identify wrongdoers and bring them to justice. If MLF finds the rest of the provisions in this Bill acceptable then the public should rest assured that it is a good Bill. Of course, that does not mean that MLF is responsible for some unforeseen glitch that may necessitate additional measures in the future, but at least, this is a good start.

    As for bank deposits or FDs, even in US, Federal Deposit Insurance Corporation (FDIC) does not guarantee all the funds that a person may put in a bank. It insures only up to $250 thousand. The idea is that those with higher savings should invest it into the stock market. If a person does not want to do that she/he may place $250 thousand each in several banks. Unfortunately the interest the banks give on these deposits is a pittance unlike in India where people plan their monthly retirement income based on these interests.

    I would like to read comments from readers about if or why this Bill is bad and how it can be improved.

    REPLY

    Sucheta Dalal

    In Reply to Meenal Mamdani 1 year ago

    While appreciating your regular comments Ms Mamdani, I do believe you are being hasty here. Details about the final bill are NOT SPELT OUT. So I cannot be objecting to things that are unknown. What I have here is a SECRET briefing note. It is important for people to know the basic structure. We can only have serious objections AFTER details are specified and the Bill is cleared by Cabinet and introduced in parliament.

    K V RAO

    In Reply to Meenal Mamdani 1 year ago

    The limit of USDOLLAR250 thousand is per depositor and not per deposit account. So having multiple bank accounts is of no use even in India. The idea of deposit insurance is to cover small deposits of common people and it's not an insurance cover for rich. Of course, in the event of a bankruptcy, even a rich person's deposit is covered. Further, you have mentioned the idea of small cover is to allow high savings into stock market. This is not correct. Stock market is one of the avenues for savings. Such savings can be channelised into real estate, gold, etc.

    Ramesh Poapt

    1 year ago

    wake up call for depositors to reconsider their concentration
    of savings !( like asset allocation)

    REPLY

    vasukir ramanujapuram

    In Reply to Ramesh Poapt 1 year ago

    If the regulation proposes a per depositor limit for insurance it should also put a limit on the financial entity in accepting a deposit from an individual, say twice the insurance limit. So that, a depositor may not loose more than 50% of his deposits.

    Godavari Joshi

    1 year ago

    Another layer of Bureacracy to already multiple regulation ! A Coordinator to oversee the "Resolution" and at an additional cost with no service to customers :(

    K V RAO

    1 year ago

    The problem is the presence of multiple organisations (non banking finance entities, cooperative banks, housing companies) in the finance field. The government or the RBI need not worry about the failures of these institutions. The simple question is: why people should keep their hard earned savings with such organisations for a couple of higher interest. The rule caveat emptor should be made applicable to all financial transactions. These organisations have converted the financial market into a jungle and are having a free ride at the cost of poor depositors. That doesn't mean that the government should bother about such things. No legislation or no authority can save the people entering into such financial jungles and making choices. In fact as the adage goes water finds its own level , people also would have by now learnt the hard way of seeking good institutions for their savings.

    REPLY

    Vinoop H Malkani

    In Reply to K V RAO 1 year ago

    Hello sir . How it a fixed deposit holder at a risk with this bill. Many indians keep their savings in fixed deposits and many live out of that interest , does this bill put their savings in jeopardy?

    Nagaraju Bommanahalli

    1 year ago

    No use of any law, your law doesn't punished any single fraud business men, court will bail after Bail,

    B Ravi

    1 year ago

    Hope this will give comfort to down line depositers to withdraw their hard earned money which under RAIF 1961 act regulated by RBI

    B. Yerram Raju

    1 year ago

    Regulation ridiculous and the law ludicrous. We need to bring some sense through larger consensus.

    We are listening!

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