The FDRI bill gives guidelines for procedure to follow when banks and insurance companies declare insolvency or bankruptcy. If this bill is passed in parliament, a regulatory authority will be formed to monitor the performance and loss probability of different financial organizations.
This bill can be termed as the one that can help in avoiding havoc in the economy caused by bankruptcy of any financial organization.
Journey of this bill:
A common thing in the world is to form a structure to avoid any crisis to repeat. We all know that some banks were bailed out by US government post 2008 crisis. But after the public opposed bailout of Lehman Brothers Bank, the government there withdrew attempts to bail this bank out and the bank obviously capsized. Most countries decided to have financial resolution and deposit insurance to avoid such nightmares like the one of 2008. Our union government proposed this bill on the same lines.
Why is it so important:
The present depository insurance credit guarantee act 1961 gives protection to depositor’s money. Financial resolution monitors financial institutions, their performance, maintenance capacity estimate, etc. The financial resolution and deposit insurance is a combo of both the above and gained utmost importance as it relates to both depositors and investors. This lead to a discussion nationwide as since the depository insurance does not exist anymore and the fear that the government will not be a guarantor anymore for the deposits up to 1 lakh in banks. It is yet to be declared the limit of protection to be provided by the new entity formed in place of DIGCC.
Bail-in is a very crucial word here and several gossips are making rounds based on this.
In this proposed bill, the 52nd clause in 12th chapter gives explanation on bail-in. Previously, if banks become bankrupt, bailout (fund rising) is done with people’s money. This was a normal in many other countries earlier as well. These actions can be termed as the ones taken to avoid future such crises. In bail-in, the bankruptcy loss may be distributed among the people involved with the bank.
Union minister Arun Jaitley clarified people not to get worried on this. Prime minister also got into the act and urged people not to take cash and deposits out of banks.