Caveats in the Financial Resolution and Deposit Insurance Bill

Manuj Joshi 29th March 2018

The Finance Resolution and Deposit Insurance (FRDI) bill was introduced in Parliament during theBudget Session of 2017 and has been due to be passed since then. The work of establishing a framework for financial resolution and deposit insurance started with the Financial Sector Legislative Reforms Committee (FSLRC) report which came out in 2013, but progress has been so slow that the Insolvency and Bankruptcy Code (IBC)whose idea came much later, has outpaced it and is already anact while FRDI is still in its formulation stage.

The bill is indispensable to build resilience in the financial sector against external shocks or internal disturbances. It ensures that every financial service provider is under the supervision of the Resolution Corporation and any shortcoming is meted out. For this, the bill proposes to institute a Resolution Corporation which will inspect the books of financial entities, classify them into various risk to valuation categories and resolve them if required.

Although the bill has covered for most probable scenarios, it still needs much more work to fill in some of the very apparent gaps left. While no bill can ever be perfect, especially so in today’s changing times, the existing weaknesses of the bill can be addressed.

The very basis on which the strength of the financial entity is to be evaluated i.e. the ‘risk to valuation categories’ is sub-par. The Resolution Corporation, in consultation with the appropriate regulator, has to classify the financial service provider into five categories of risk to valuation on which the plan of action will be determined. However, the classificationis determined on subjective parameters like the capability of management, sensitivity of the firm to adverse market conditions, risk of failure of a holding body or a connected firm, quality of assets etc. This can lea...

Note: Views expressed in this blog are those of the author.