Conflicting views between govt and RBI led to withdraw of FRDI Bill

RBI criticised various provisions that might have transferred some of its powers to the proposed Resolution Corporation

Before the government decided to withdraw the contentious Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, various regulators and institutions had objected to it.

These included the Reserve Bank of India (RBI), which criticised various provisions that might have transferred some of its powers to the proposed Resolution Corporation. Strong opposition came from the RBI governor Urjit Patel, who pressed for a need to create a clear distinction between the role of the regulator and the proposed Corporation.

Patel wanted “proper harmonisation of roles and responsibilities of the regulators and Resolution Corporation, so as to obviate the scope for conflicts of jurisdictions”, according to the minutes of a meeting of the joint parliamentary committee on the Bill, chaired by Rajya Sabha member Bhupendra Yadav. The panel gave its report to Parliament on Wednesday, agreeing with the government proposal to withdraw the Bill.

The Resolution Corporation was proposed to carry out speedy and efficient resolution of financial firms in distress, including banks and insurance companies. It would have taken over failing banks, run, sell and even liquidate these. RBI demanded for itself a dominant role in risk assessment of lenders under the new framework. According to a proposal in the Bill, the Resolution Corporation would have classified financial entities according to the risks they posed. In categories such as material, imminent or critical risk to viability, and take appropriate action.

“The RBI governor also suggested the need for suitable changes in the Bill to provide that the appropriate regulator carry out the classification of various risks to viability in consultation with the Resolution Corporation, instead of empowering the (latter) to do this task in consultation with the appropriate regulator”, according to the minutes. Patel also pointed to concerns on the criteria for risk classification, setting up of financial service providers as systemically financial important institutions, information sharing between regulators and the Resolution Corporation, and the latter's proposed powers on search and seizure.Patel also pointed to concerns on the criteria for risk classification, setting up of financial service providers as systemically financial important institutions, information sharing between regulators and the Resolution Corporation, and the latter's proposed powers on search and seizure. Some of the issues relating to the regulatory powers proposed for the Corporation were also flagged by the All India Reserve Bank Employees Association in a submission to the panel.

The Insolvency and Bankruptcy Board of India stressed the need for a “clear division of jurisdiction between Resolution Corporation, Insolvency and Bankruptcy Board and Insolvency Code”, apart from other issues.

The Competition Commission of India expressed concern on the powers proposed to be given to the Resolution Corporation, in case there was a difference in opinion on classification of financial institutions in the risk categories. And, the National Housing Bank demanded its inclusion as a regulator for housing finance companies under the Bill.