All About FRDI, Financial Resolution and Deposit Insurance Bill

by Legal Suvidha



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The government will introduce a new bill in Parliament in the winter session called the Financial Resolution and Deposit Insurance (FRDI) bill. 

The FRDI Bill aims to put in place an early warning system for financial firms. It covers banks, insurance companies, payment systems, stock exchanges, and some others are financial firms. When banks fail who gets hurt? Depositors like you and me. If an insurance company fails, again it is us, the retail consumers who get hurt. If a biscuit maker or a noodle company or a car company fails, we may get hurt due to reduced choices, but there is no financial implication (unless you are an investor), but when a financial firm fails, we can lose our money that has been entrusted to the firm. That is why we need a different set of rules for financial firms.

Finance Minister Arun Jaitley has categorically asserted that depositors would be “fully protected” in the event of a bank failure, one of the clarification the government has made on the issue in less than a week as it seeks to allay mounting concerns about a proposed ‘bail-in’ clause in a draft legislation on financial resolution.

the FRDI Bill is depositor-friendly and provides more protection to them compared to existing provisions. The statement comes in the wake of "certain misgivings" that appeared in some reports about 'bail-in' provisions of the FDRI Bill. The provisions in the FRDI Bill do not modify current protections for depositors adversely at all

“The Union Minister for Finance and Corporate Affairs Arun Jaitley said that the Financial Resolution and Deposit Insurance Bill 2017 is before the Joint Committee of Parliament,” the Finance Ministry said in a statement on Monday. “Whatever are the recommendations of the Committee, the Government will consider them. But rumours are being spread about the Bill.”

In the backdrop of criticism in the media and on social media about the ‘bail-in’ clause, which allows for the cancellation or modification of bank deposits to shore up bank finances, the Ministry of Finance had issued a statement saying that the provisions of the FRDI Bill do not hurt depositors’ interests.

It is the bail-in clause that is causing all the panic in the minds of the depositors. Will my deposits be used to reduce the liability of the bank? No, you do not need to worry that your deposits will be lost in a bail-in. Your deposits will be insured, just as they are today and there is an additional protection for depositors because the bail-in can be invoked, and your deposits be lost, only if you have given your consent for this to the bank when you signed the deposit forms.

You need to remember that the bail-in clause is just one of the prescribed methods that the RC can use. If the system in place is robust, few firms will actually reach a critical stage of risk. The approach that the FRDI bill takes should make you actually feel safer. Instead of an ad hoc personality driven approach, India will now have a rule of law based approach to financial firms

The FRDI debate finally comes down on the intent of the government. It will be political suicide for a government that allows bank depositors to lose their money due to bank failure, even beyond the insured amounts. Public sector banks have just got recapitalised to prevent bank failure. That option remains with the government even after the FRDI Act comes into being. As taxpayers we should worry about the impact of such bail-outs that happen when financial firms fail without a process in place, on how our taxes are being used to pay for the inefficiency of banks that made loans they cannot recover. A well-defined system that makes banks more accountable and gives an early warning of ill health is progress, without exposing our deposits to more risk than they face today is progress.

“Mr. Jaitley said that the Government has already clarified and said it is committed to strengthen the PSU banks and the financial institutions,” the ministry added in its statement on Monday. “Removing any misgivings and rebutting false rumours being spread about the provisions of the FRDI Bill 2017, the Finance Minister said that about ₹2.11 lakh crore is being pumped in to strengthen the public sector banks. So no such question arises (regarding the failure of banks).”

“If such a situation arises, deposits made by the customers, the Government will fully protect them. The Government is very clear about it,” Mr. Jaitley was cited as saying in the statement.

“The provisions contained in the FRDI Bill, as introduced in the Parliament, do not modify present protections to the depositors adversely at all,” the ministry added in the statement. “They rather provide additional protections to the depositors in a more transparent manner.”

 



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