English Hindi


Prelims Capsule


Financial Resolution and Deposit Insurance Bill soon to be reintroduced by Centre, What is FRDI Bill

Financial Resolution and Deposit Insurance Bill soon to be reintroduced by Centre, What is FRDI Bill


  • GS 3 || Economy || Banking & Financial Sector || Financial Regulators

Why in the news?

Financial Resolution and Deposit Insurance Bill soon to be reintroduced by Centre.


The Financial Resolution and Deposit Insurance Bill 2017 was referred to a Joint Parliamentary Committee made up of 30 members from both Houses in October 2017. Once passed, this bill will repeal the Deposit Insurance and Credit Guarantee Corporation Act of 1962, transferring deposit insurance rights and responsibilities to the planned Resolution Corporation, as well as amending 12 other statutes.

Present context:

  • The new Bill intends to improve the current financial business resolution process, which is fragmented, incomplete, and subject to several laws and regulatory agencies.
  • Despite the fact that the government introduced the FRDA law in 2017, it was withdrawn due to the contentious Bail-in provision.

Important provisions in new bill:

  • It establishes clearly defined triggers for a prompt corrective action (PCA) structure to resolve a problem institution.
  • Infrastructure Leasing & Financial Services—IL&FS—was allowed to spawn over 347 subsidiaries and associates while the group holding company remained unlisted and out of the public eye, and this is a lesson learned.

Changes made in bill:

  • 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 will bailout (to provide liquidity).
  • The FSDR has removed the controversial ‘bail-in’ provision.
  • 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.

Financial Resolution and Deposit Insurance Bill, 2017:

Key Objectives of bill:

  • Resolving insolvency in financial institutions:It intends to establish a framework for resolving insolvency in financial institutions such as banks and insurance companies, as well as to instil discipline in financial service providers in the case of a financial crisis by restricting the use of public funds to bail out distressed organisations.
  • Regulate financial service providers:It also aims to regulate financial service providers, such as banks (except cooperative banks), insurance companies, financial market infrastructure, payment systems, and non-banking finance companies, in order to comply with emerging international norms aimed at establishing an effective financial sector resolution regime.

Key Provision of the bill:

  • Resolution Corporation: According to the law, the Central Government will establish a Resolution Corporation as an independent regulator, with a Chairperson and representation from the Finance Ministry, RBI, and SEBI, among others. The Reserve Bank of India (RBI) and other authorities would no longer be in charge of resolving failed financial institutions. Functions of the Corporation will include:
    • Deposit insurance for banks (to return deposits to customers in the event of collapse), risk classification for service providers such as banks and insurance companies, and service provider resolution in the event of failure.
    • If the Bill’s requirements are being broken, the corporation may investigate service providers’ activities or conduct search and seizure operations.
    • The Resolution Corporation would also take over the responsibility of guaranteeing bank deposits in the event of a bank failure, compensating depositors up to a predetermined maximum sum, which is now Rs.1 lakh.
  • Risk based Classification: The Resolution Corporation is responsible for classifying service providers depending on their risk of failure after consultation with authorities such as the RBI for banks and the Insurance Regulatory and Development Authority (IRDA) for insurance businesses. Low, Moderate, Material, Imminent, and Critical are the four categories established depending on the risk of failure.
    • Low: The risk of failure is significantly lower than what is considered tolerable.
    • Moderate: The risk of failure is marginally lower than acceptable.
    • Material: Failure Probability Exceeds Acceptable Limits
    • Imminent: The risk of failure is significantly higher than acceptable limits.
    • Critical: On the point of failure, service providers

A service provider that is classified as “imminent” or “critical” must submit a restoration plan to the regulator as well as a resolution plan to the Corporation. These plans will include the following information:

  • Details of assets and liabilities.
  • Steps to improve risk based categorization.
  • Information necessary for resolution of the service provider.

When a service provider is classified as Critical, the Corporation will assume control of the service provider’s management as of the date it is classified as ‘critical.’ The corporation will handle the resolution of service providers categorised as critical utilising the following options.

  • Transfer of its assets and liabilities to another person
  • merger or acquisition, and
  • Liquidation
  • Bail-in aid
  • Liquidation
  • Time limit: When a service provider is designated as “essential,” the resolution procedure will take a year to complete. This deadline could be extended for another year (i.e. maximum limit of two years).If the service provider’s resolution is not accomplished within this time frame, the service provider will be liquidated.
  • Liquidation and distribution of assets: The Corporation will need the National Company Law Tribunal’s permission to liquidate a service provider’s assets.Proceeds from asset sales will be dispersed in the following order of priority:
  • Offences: The bill establishes penalties for crimes such as property hiding and evidence destruction or fabrication. Penalties vary depending on the nature of the offence, with a maximum sentence of five years in prison and a fine.
  • Others: The bill also establishes a systematically important financial institution designation for specific types of financial institutions (SIFIs).

Importance of the bill:

  • Explicit regulation governing:In India, there is currently no explicit regulation governing the resolution of financial services provider failures. Financial service firms are not immediately covered under the Insolvency and Bankruptcy Code 2016.
  • Separate law addressing financial service:As a result, a separate law addressing financial service providers was required. The bill also prohibits the use of public funds to bail out insolvent businesses. In the case of a financial crisis, this would instil discipline among financial service providers.
  • The bill ensures proper preventive measures and also offers the tools needed to deal with a post-crisis situation, assisting in the economy’s financial stability. It also aims to cut down on the time and expenses associated with resolving distressed financial firms. In times of financial crisis, the bill also aims to protect customers of financial service companies.


  • Bail-in: Clause 52 of the FRDI Bill empowers the Resolution Corporation to use bail-in as a mechanism of resolution, either through a bail-in instrument or a scheme designed particularly for that purpose. It gives the Corporation the authority to cancel a liability as well as modify or change the form of a liability, such as converting an instrument from one class to another, replacing an instrument with another, creating a new security, and, for central counterparties specifically, directing a haircutting of collaterals and margins, as well as the issuance of equity to creditors.
  • No mechanism for redressal of grievances: The Bill authorises the regulator or the Resolution Corporation, as the case may be, to put a financial firm into any of the five aforementioned categories. The necessary corrective action is conducted based on this classification. There is no provision in the Bill for anyone who feels wronged to appeal the categorization.
  • Cross-border resolution:The FRDI Bill contains limited provisions for foreign resolution action, allowing the Central Government to enter into an agreement with the government of any country outside of India for the purpose of executing the Act’s provisions. Many financial organisations operate on a global scale, and a lack of standards or standardisation might result in conflict.

Criticism of the Bill:

  • When service providers are classified as “material” or “imminent,” depositors who are afraid of failure will wish to withdraw their funds.
  • As a result, rather than alleviating the problem of vulnerability to failure, the mechanism may instead cause it.
  • To be acceptable, the restoration and/or resolution plan may “force” a financial institution to embrace amalgamation or merger.
  • This would affect parties that aren’t accountable for the company’s state, such as officers, employees, creditors, and tiny shareholders.

Insolvency and Bankruptcy Code Vs FRDI:

  • A Financial Resolution and Deposit Insurance Act, as well as the Insolvency and Bankruptcy Code, 2016, are planned to provide the Indian economy with a comprehensive resolution process, with the goal of protecting consumers of specific service providers and public finances.
  • Both of these bills deal with concerns that can occur when businesses go bankrupt or insolvent, with the exception that this Bill solely applies to businesses in the financial sector. The Insolvency Code Act applies to businesses in all other industries.

Mains oriented question:

What impact would the Insolvency and Bankruptcy Code, 2016 and the Financial Resolution and Deposit Insurance Bill have on the average person’s life? What impact would they have on public policy on financial matters? (250 words)