The government on Wednesday decided to withdraw the Financial Resolution and Deposit Insurance (FRDI) Bill from consideration by Parliament, where it has been referred to a Joint Parliamentary Committee for study. The Union cabinet decision follows strong objections from several quarters about quite a few provisions of the Bill. Unions of workers in nationalised banks and in state-run insurance companies were particularly vociferous in their objections. While it is always unfortunate when important measures are rolled back, on this occasion the government should be commended for listening to the voices of dissenters. Concerns about the “bail-in” provision of the FRDI Bill had simply become too strong and, in the absence of any coherent defence from the Bill’s backers in the government, had become too dangerous for confidence in the banking system overall. Nor did the timing work for a government with one eye on the poll schedule. If the Joint Parliamentary Committee brought out its recommendations in the winter session of Parliament, that would bring the Bill up for voting in the House quite close to the general election campaign season, during which the ruling Bharatiya Janata Party would be hard put to defend the provisions of the Bill. These internal political calculations, very understandably, doomed the Bill.
The FRDI Bill served a worthy and important purpose: To deal with the question of insolvency in the banking sector, including for banks, non-bank financial companies, or NBFCs, insurance companies, mutual funds, and so on. Exit for such entities that have run into trouble needs to be made efficient and equitable. The long-term goal is to ensure that banking is more attractive for new players so that on-tap bank licences are picked up, the goal of financial intermediation is served, and the salience of the public sector in banking is reduced. There is also currently a boom in consumer finance, which, in the absence of proper financial education, might lead to problematic outcomes unless proper legislation is in place. This is particularly important, given the government’s drive towards the financialisation of household savings.
However, aspects of the FRDI Bill had given rise to disquiet, and the public murmur over these provisions clearly outweighed, in the government’s mind, the obvious importance of the proposed law. In particular, there were concerns that the bail-in provision would lead to depositors losing their money. This provision provides for restructuring a financial institution using its own resources. The point is to ensure taxpayer money is not constantly compromised; of course, insured deposits are excluded. The government further clarified that this would not apply to public sector banks, and was the last recourse for other banks. However, this did not satisfy many vocal objectors. The bail-in provision was poorly drafted, with insufficient transparency in the text. There was also ambiguity about the scope of deposit insurance. Given that, this provision served as a poison pill for the Bill as a whole. Hopefully, the government has not abandoned the notion of insolvency legislation for the financial sector altogether. It will be important for work to start instantly on drafting a new Bill that serves the purposes that the FRDI Bill was supposed to. Hopefully, this Bill will have clearer provisions for depositor protection. Time is of the essence, as the financial sector should not be ignored for too long.