The Financial Resolution and Deposit Insurance Bill, 2017, introduced in Parliament during the monsoon session, seeks to create a framework under which banks and other financial services providers would be allowed to use depositor's money to bail themselves out in cases of bankruptcy.
The legislation, which was specifically introduced for resolution of failures of financial services providers, could end up in shifting the onus of failure of financial service providers to its customers, say reports.
The legislation was introduced in the monsoon session but was later referred to a joint committee of both the houses of Parliament, the Lok Sabha and the Rajya Sabha.
The provisions in the Financial Resolution and Deposit Insurance Bill, 2017, (FRDI) will allow banks to have more control over depositors' money. It allows banks to use that money to stay afloat in a financial emergency.
It would also mean that depositors pay for errant corporate borrowers like Vijay Mallya.
The legislation will allow a bank facing financial problems to use depositors' money to reduce its liabilities. It may even allow a bank to lock depositors' money for a long time or even take away part of the amount for redressal.
Also, the bill proposes changes in insurance claims of depositors on the money deposited. According to the 1961 Deposit Insurance and Credit Guarantee Corporation Act, up to Rs1 lakh of money deposited in a bank is insured if a bank were to fail.
The FRDI bill proposes changes in this. It wants the creation of a Resolution Corporation which can use depositors' money in case the bank fails.
Instead of government money being used to bailout banks in distress, the new bill provides that depositors' money be used to rescue the bank or reduce its liabilities.
What has usually been happening so far is that when a bank is about to shut down or incurring huge losses, the RBI steps in and merges or allows it to be taken over by healthier banks, including their liabilities.
If passed, the bill will greatly weaken depositors' rights and jeopardise recovery of money deposited in case of a bank failure.
Meanwhile the All India Reserve Bank Employee Association is reported to have written to RBI governor Urjjit Patel demanding security against the proposed Financial Resolution and Deposit Insurance Bill by increasing the maximum coverage of insured bank deposits from Rs1 lakh to Rs10 lakh. The association has also asked the central bank to increase representation of RBI members in Financial Resolution Committee.
The association has asked that depositors' money must be ensured after the passage of the proposed Financial Resolution and Deposit Insurance Bill.