[op-ed snap] Time to go to FRDI Bill’s roots


Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Bail-in and Bail-out clause given in the FRDI bill

Mains level: The two issues, discussed in the newscard, related to the FRDI bill


Background of ‘resolution corporation’ in India

  1. In India, the idea of a resolution corporation was advocated in 2013 by the Financial Sector Legislative Reforms Commission
  2. This was followed up in 2014 with a Reserve Bank of India (RBI) working group report on crafting a resolution regime for financial institutions
  3. Finally, in 2016, a Union finance ministry committee submitted a draft code on the resolution of financial firms

Working under the the Financial Resolution and Deposit Insurance Bill, 2017

  1. The FRDI Bill have focused on the formation of a resolution corporation and its bail-in powers in the event of a financial company going bust
  2. The said corporation will monitor financial services companies, in coordination with regulators, and resolve them in case of failure
    Difference between ‘bail-in’ and ‘bail-out’
  3. Bail-in implies using the company’s various existing liabilities—different debt categories or deposits not covered by deposit insurance (all deposits over Rs1 lakh)—to resolve impending failure
  4. This is different from bailout, which implies external help, such as government using taxpayer money

There may be some merit in constructing a resolution regime
But there are other equally larger issues that also need highlighting

FIRST: There is a need to discuss the relevance of an imported idea(present in the FRDI bill)

  1. The idea of resolution corporation given in the bill is taken from other countries like the USA, Singapore, etc.
  2. But the Indian government’s willingness to accept a cut-and-paste formula is curious
  3. We have seen similar decisions in the past which seemed alien to the peculiar complexion of India’s financial services—salary cap for financial sector CEOs
  4. In a system where banks (with an overwhelming public sector presence) dominate the financial system and are extensively regulated by RBI
  5. There should be some discussion about whether importing regulatory frameworks, in universum, makes sense

SECOND: The issue of democracy and fundamental rights

  1. In its current form, the FRDI Bill disallows the proposed corporation’s resolution process from being challenged in courts
  2. This might be necessary to avoid undue delays in the resolution process and to avoid failure of wobbly financial companies
  3. The overwhelming presence of government representatives on the corporation’s board (including regulators’ representatives) can convert the corporation into a blunt tool of vengeful political action
  4. Also, the new regulators may take away the powers of old regulators, such as RBI
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