Govt likely to remove controversial bail-in provision from FRDI Bill

The Narendra Modi government is likely to remove the controversial “bail-in provision” from the revamped Financial Resolution and Deposit Insurance (FRDI) Bill.

As reported earlier, the finance ministry has started work on reviving the Bill a year after withdrawing it. The proposed law was mooted to usher insolvency of financial institutions.

Officials say the redrafted and revamped Bill will be a crucial tool for the government to deal with the liquidity crisis in the non-banking financial company (NBFC) sector, as a number of NBFCs like Infrastructure Leasing & Financial Services and Dewan Housing Finance Corporation (DHFL) have defaulted on their payments to creditors.

“The bail-in clause will be dropped. Details are being worked out. The draft Bill will be ready for inter-ministerial consultations soon,” said a senior government official.

According to the “bail-in” clause, proposed for the first time in the country’s law, customers of a failing financial institution would bear a part of the cost of resolution by reduction in their claims. It was one of many resolution tools in the FRDI Bill, including acquisition and merger.

The late finance minister Arun Jaitley had in August 2017 introduced the FRDI Bill in the Lok Sabha, which proposed a comprehensive resolution framework for revival or closure of financial institutions, including commercial banks, insurance companies, NBFCs, and co-operative banks.

The government had proposed setting up an independent resolution corporation for carrying out “speedy and efficient resolution of financial firms in distress”. The Bill was referred to a joint committee of Parliament.

However, in August 2018, the then finance minister Piyush Goyal withdrew the FRDI Bill, following concerns raised by public related to the “bail-in” clause and because of a conflict of opinions with various regulators, including the Reserve Bank of India.

Though the government, in a series of clarifications, said the clause would be sparingly used for resolution, concerns persisted among the general public, and the finance ministry believed it was one reason behind a spurt in cash withdrawal seen across the country that led to cash crunch in automated teller machines last year.