The FRDI Bill launched wild rumours all over the country, sowing seeds of distrust among bank customers over a “bail-in” clause, which theoretically allowed beleaguered banks to scoop up depositors’ money to stop them from going bust. However the ill-conceived FRDI bill was withdrawn by the Government and now replaced the same by a new bill – tentatively named as Financial Sector Development and Regulation (FSDR) Bill. The revised bill does not contain the ‘bail-in’ clause, but it will set up a resolution authority that will take over the RBI’s and other financial sector authorities’ powers to resolve cases of banks and financial institutions that go bust or are near going bust.
The authority to be set up shall be represented by all financial sector regulators including RBI, SEBI, Insurance Regulatory and Development Authority and PFRDA. The authority has the power to consider any of the following steps as a resolution plan for bust financial institutions or banks
- They could be either amalgamated with another firm or bank or
- Modify liabilities which means they can set a limit to the liabilities that would be paid out (Part of their liabilities could be canceled) or
- Assets could be sold off to Asset Reconstruction companies or others or
- An interim mechanism could be created while a final decision is taken.
However, in the case of significantly important financial sector players, the authority could take preemptive steps to manage delinquencies. The authority will also run a deposit insurance guarantee under a new name for which it will set limits, which it will periodically increase or decrease the quantum of deposit insurance as the need arises. The current insurance limit under DICGC is Rs 1 lakh this is likely to go up to Rs 5 lakh, though the amount is yet to be decided.