The Union Cabinet, chaired by Prime Minister Narendra Modi, has approved the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017 to be introduced in the Parliament. This Bill is similar to the Insolvency and Bankruptcy Code, 2016, which was enacted last year in May. Both of these are about issues that can arise when companies go bankrupt or insolvent, except that this Bill deals only with the companies that are in the financial sector. The insolvency code Act deals with companies in all other sectors. The FRDI will provide a comprehensive resolution framework to deal with bankruptcy situations in financial sector entities such as banks and insurance companies. Let’s read more about the Bill.
In his 2016-17 budget speech, Union finance minister Arun Jaitley said, “A systemic vacuum exists with regard to bankruptcy situations in financial firms. A comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17.” Following the announcement, on 15 March 2016, a committee was set up under the chairmanship of Ajay Tyagi, additional secretary, Department of Economic Affairs, Ministry of Finance, to draft and submit the Bill. The committee also had representatives of the financial sector regulatory authorities and the Deposit Insurance and Credit Guarantee Corporation.
The committee submitted its report and based it the draft FRDI Bill was drawn up. The finance ministry sought comments on the Bill till 31 October 2016 and after consideration of the suggestions, the Union Cabinet approved it to introduce it in the Parliament.
What the FRDI Bill offers
According to the finance ministry, FRDI Bill, 2017 seeks to protect customers of financial service providers in times of financial distress.
It also aims to inculcate discipline among financial service providers in the event of financial crises, by limiting the use of public money to bail out distressed entities.
The Bill would help in maintaining financial stability in the economy by ensuring adequate preventive measures, while at the same time providing the necessary instruments for dealing with crisis events.
The Bill aims to strengthen and streamline the current framework of deposit insurance for the benefit of retail depositors.
Further, it seeks to decrease the time and costs involved in resolving distressed financial entities.
Once enacted, a resolution corporation will be setup to strengthen the stability and resilience of the entities in the financial sector.