Modi govt plans to withdraw controversial FRDI Bill amid public backlash

The FRDI Bill, introduced in the Lok Sabha last August, had drawn protests from the Opposition, the bank unions and the public alike over its 'bail-in' clause, which was feared as harming the interest of depositors.

By BusinessToday.In  
Thursday, July 19, 2018

The joint parliamentary committee looking into the proposed Financial Resolution and Deposit Insurance (FRDI) Bill is yet to submit its report but the Centre is reportedly ready to drop it soon. The Modi government clearly does not want to risk more public backlash over the contentious bill in the run up to election year next year.

Sources told PTI that the government is likely to withdraw the FRDI Bill in the ongoing session of Parliament, which ends on August 10. In fact, they added that the Union Cabinet, chaired by Prime Minister Narendra Modi, has already given its nod to this move.

The FRDI Bill, introduced in the Lok Sabha last August, had drawn protests from the Opposition, the bank unions and the public alike over its 'bail-in' clause, which was feared as harming the interest of depositors.

The Bill, essentially, proposed to create a framework for overseeing of financial institutions such as banks, insurance companies, non-banking financial companies (NBFCs) and stock exchanges in case of insolvency. It further provided for the setting up of a Resolution Corporation, which would look after the process and prevent the banks from going bankrupt.

Significantly, as per the provisions of the bill, the Resolution Corporation would be entitled to manage this by "writing down" the liabilities of an at-risk bank. This was widely interpreted as "bail-in" clause, whereby bank deposits - which are basically liabilities - stood to be cancelled if a bank ran into deep financial trouble.

There was enough and more global examples of failing banks being bailed out by governments using public money. In case of a bail-in, it is the depositors' money that is leveraged the same way. So, obviously, plenty of stakeholders expressed concern over this clause.

Last December, Assocham Secretary General DS Rawat had pointed out that the concept of ''bail-in'' especially by depositors ought to be completely done away in the Indian context, and that their money needed to be protected at any cost. "Otherwise, the trust in the banking system runs the risk of being eroded and the savings by the households would find way into unproductive avenues like real estate, gold, jewellery and even in the unorganised and informal financial markets run by unscrupulous people," he said, adding that bank deposits are the only financial security for most middle class families, pensioners and other elderly people. Given the rising cost of healthcare in the country - a major blow to the middle class - Rawat had cautioned against any move to copy the Western model of bail-in.

The Opposition, likewise, had vociferously criticised the Bill. A senior Congress leader had branded it as "the third major economic blunder" of the Modi government after demonetisation and Goods and Services Tax Act, if passed. The Trinamool Congress had called it "draconian" while the CPI-M party had decried it as a "blatant attack on crores of common depositors who put their lifelong earnings in banks".

The fact that the FRDI Bill did not specify any deposit insurance amount only fuelled the criticism against it. At present, all deposits up to Rs 1 lakh are protected under the Deposit Insurance and Credit Guarantee Corporation Act, which stood to be replaced by the proposed bill.

In the face of the mounting backlash against the Bill, the government had referred the bill to a Joint Parliamentary Committee last year. The panel was slated to submit its report by the last day of the ongoing Monsoon session, after having been given a deadline extension by the lower house last December. But now, it appears, the Modi government is no longer interested in the recommendations of this committee.

The decision is a sharp U-turn from the government's vigorous defence of the bill till earlier this year. In December, the then Finance Minister Arun Jaitley had asserted that the government was committed to protecting the interests of depositors in public sector banks (PSBs) and that the FRDI Bill need not be feared. "The committee has wise people which will make some recommendations. We will consider that. We are open-minded. We are very clear and the level of protection the government would want would be much higher than level which existed till today," he had said.

He had also pointed towards the Rs 2.11 lakh crore capital infusion previously declared by the government to strengthen banks, explaining that there was no need to worry about any lender failing. A day later, Modi spoke out in a similar vein, asking the public not to pay heed to "rumours" regarding the proposed bill.

Then, in January, Economic Affairs Secretary Subhash Chandra Garg had said that attempts to create scare regarding bail-in were totally unfounded. "70 per cent deposits are in PSBs. Most remaining deposits are in well capitalised and sound private banks. No likelihood of bail in for over 98 per cent of depositors. Remaining also subject to bail in if the depositors consent," he had tweeted.

With PTI inputs

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