What PNB scam teaches us? Why bills like FRDI bill are critical?

For me, its time to push banking reforms in a bigger way; FRDI bill only one way, but we need to bring in more and more reforms; The need for a stronger resolution mechanism emerged after the 2008 global financial crisis, when governments across the globe were forced to bail out financial institutions or move them into routine bankruptcy.

Some Positives of the FRDI bill would be the fact that establishes credit resolution by monitoring financial firms and banks. This could perhaps have an impact on the current fixed deposit insurance amount which is one lakh, further increasing safety for the customers. FRDI can avoid past scenarios like the fall of Lehman Bros in the US.

The bill recognizes that financial firms are different and, hence, should be handled differently. Simply put, the new bill aims for an orderly winding up of a financial institution. It talks about setting up of a Resolution Corporation (RC) that will identify early warning signs of distress at financial institutions, including banks, non-banking financial companies, insurance companies, stock exchanges, etc.


Especially when institutions like internal audit system, external audit system, RBI is being failed one need a new strict mechanism. If any financial institution falls under the ‘critical’ risk category, the RC will immediately take over, while the sector regulator would continue to use its tools to resolve the crisis. The tools at the RC’s disposal will be transferring assets and liabilities to another firm, bailins, forced mergers, liquidations, or temporarily running the firm under a bridge entity.

So far, the government or Reserve Bank of India (RBI) has not been bold enough to let some banks die. Takeovers and mergers have been a taboo for RBI and since the liberalization of the banking industry in 1991, there have been only 19 takeovers. Barring a couple, all others were bailouts for struggling lenders, and not aimed at improving efficiency or extracting synergies.

It is this bail-in feature of the FRDI bill that is causing the stir amongst people who are criticizing the clause. Mainly because it is the depositor’s money that can be used by the drowning financial institution to stay afloat. In their defence, this is not a very common scenario. At the moment, the good news is that the Deposit Insurance and Credit Guarantee Corporation (DICGC) is eligible to protect each depositor of the bank for up to a limit of one Lakh. Any amount above that does not cover the guarantee.


It is interesting to note that the resolution corporation will categorize financial firms under 5 categories, Low, Moderate, Material, Imminent and Critical, and will take over the firms which fall under the ‘Critical; category to resolve its issue in a year, extensions might be requested under certain requirements.

So depositors dont need to worry until their bank’s status becomes “CRITICAL”, its the framework that reviews the situation periodically and changes the status; Until the situation becoems “CRITICAL”, no depositor need to worry;


The good news is that the government’s objective is to fully protect the interest of financial institutions and the depositors. With this intent, it is only a game of wait and watches to see what the standing committee decides and the financial limit on which the insurance is set for the Bail-in clause.


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