Bail-in clause in FRDI Bill will only be used sparingly: Finance ministry

Subhash Chandra Garg, secretary in the department of economic affairs in the finance ministry.

Subhash Chandra Garg, secretary in the department of economic affairs in the finance ministry.

New Delhi: Seeking to assuage concerns of depositors, the finance ministry on Tuesday defended the bail-in clause in the FRDI Bill and said the provision will only be used sparingly.

The ministry also said the bail-in clause in the Financial Resolution and Deposit Insurance Bill, 2017, is unlikely to be ever used for public sector banks, as it sought to assure investors that their deposits in banks are secure.

Subhash Chandra Garg, secretary in the department of economic affairs in the finance ministry, tweeted that existing safeguards for depositors will increase under the provisions of the bill.

“Bail-in will be only sparingly used. Public sector banks will effectively not be subject to bail-in provisions. Depositors need not have any apprehensions,” he wrote on Twitter.

The FRDI Bill aims to limit the fallout of the failure of institutions like banks, insurance companies, non-banking financial companies, pension funds and stock exchanges.

The bail-in clause has been proposed as one of the resolution tools in case of the failure of a bank, wherein the depositors will have to bear a part of the cost of the resolution by a corresponding reduction in their claims. This had stoked fears that deposits could be used to bail out failing banks.

The FRDI Bill 2017 was tabled in the Lok Sabha in August, following which it was referred to a joint parliamentary committee. The committee will submit its report on the last day of the upcoming budget session and the bill is then likely to be tabled in Parliament only in the monsoon session.

The provisions of the bill, especially related to bail-in and insurance of deposits, has been opposed by trade unions and many opposition parties that have termed it anti-people and anti-poor.

A finance ministry statement said insured deposits of banks cannot be used in case of bail-in. It added that the bail-in instrument designed by the regulatory body—the Resolution Corporation—will be subject to government scrutiny and oversight of Parliament. Cancellation of the liability of a depositor beyond the insured amount will be possible only with the prior consent of the depositor.

“Bail-in power can be used in a judicious and reasonable manner only by the Resolution Corporation and it will have to ensure that all creditors, including uninsured depositors, get at least such value, which they would have received in the event of liquidation of a bank,” the statement said, adding that depositors will have the right to get compensation from the Resolution Corporation in cases where the depositors of a bank get less value than that they would have got in case of liquidation of the bank.

The statement added that deposits up to Rs1 lakh will continue to be insured under the bill. Rights of uninsured depositors will be better protected after the passage of the bill, the statement said.

“The uninsured depositors, that is, beyond Rs1 lakh, of a banking company are treated on par with unsecured creditors under the present law and paid after preferential dues, including government dues, in the event of its liquidation. As per the provisions of the FRDI Bill, the claims of uninsured depositors in the case of liquidation of a bank will be higher than those of the unsecured creditors and government dues. Therefore, the rights of uninsured depositors will be better protected and such depositors will have an elevated status in the FRDI Bill compared to the existing legal arrangements,” it said.

[“Source-livemint”]