FRDI Bill pits depositors against borrowers

The centre, which sought to peg deposit insurance cover lower through the Financial Resolution and Deposit Insurance Bill amidst a surge in bad loans of state-run banks, has now offered to raise the ceiling on deposit cover under pressure from members of Parliament.

While the existing rules set the deposit insurance cover at Rs1 lakh, the new FRDI Bill seeks to abandon deposit protection rules and favour insolvency resolution in favour of banks, thereby pitting depositors against borrowers.

The centre has now conveyed to a joint committee of Parliament deliberating on the Financial Resolution and Deposit Insurance Bill that it is ready to amend the legislation to ''specifically state'' an upper limit for deposit insurance, but did not specify the amount.

With bad loans taking centre stage in banking industry, RBI governor Urjit Patel also favours Rs1-lakh status quo, fearing a spike in banks' liability.

The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI, currently insures the deposits with financial institutions up to a limit of Rs1 lakh.

According to DICGC data, 92 per cent of total accounts constituting 30 per cent of the amounts deposited with banks are fully protected.

The remaining 8 per cent constitute 70 per cent of the deposit amount and any increase in insurance cover will increase the burden on banks, according to RBI.

The limit for deposit cover, which was increased from Rs30,000 to Rs1 lakh on 1 May 1993, continues to remain at that level despite a need to link it to rising financial costs and inflation.

Members of Parliament want the government to provide for an increase in deposit cove and ensure that the amount is specified in the present Bill.

The committee on FRDI Bill headed by senior BJP leader Bhupender Yadav is reported to have discussed the Department of Economic Affairs's stance with RBI governor Urjit Patel. The governor, however, favours the existing provision, where the deposit insurance is capped at Rs1 lakh.

The RBI had suggested that a new provision be added to the FDRI Bill to ensure that the Rs1-lakh limit continues.

The Bill was submitted to a joint parliamentary committee for review following criticism that the interests of depositors and employees do not seem to be protected due to the powers vested in the new insolvency resolution set-up created through it.

The FRDI Bill seeks to constitute a 'resolution corporation' whose affairs and business will be managed by a board, with members nominated by the union government representing the finance ministry, the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority.

The agency, which will have three whole-time members appointed by the union government and two independent members, will work under the finance ministry.

The establishment of the resolution corporation will undermine the authority of the RBI (an autonomous institution) in its role as a regulator, as all the matters concerning the restructuring of sick/unviable financial institutions will be under the scope of the resolution corporation.

The committee got an extension to submit its report on the Bill by the last day of the Budget Session 2018, but seems unlikely that its report is tabled in the present Budget Session.