UNINSURED DEPOSITORS LIKELY TO GET PREFERENCE OVER OTHER CREDITORS

UNINSURED DEPOSITORS LIKELY TO GET PREFERENCE OVER OTHER CREDITORS

A proposed Financial Resolution and Deposit Insurance Bill (FRDI), which is aimed at orderly resolution of bankruptcies in the financial services sector, includes a special high-risk deposit instrument, regulatory supervision by the finance ministry, and a bankruptcy framework that will envelope all financial institutions.

Just like the current bank deposit insurance scheme, deposits up to Rs 1 lakh would be insured but there is also a proposal for a new kind of high-yielding deposits which can be called whenever they are deemed critical, which can be referred to as a bail-in clause. These instruments would be last in the line for payments in case of liquidation.

“The bail-in provision relates to instruments specifically issued with a bail-in clause upfront with the specific understanding that these liabilities can be called up when the financial institutions are deemed critical,’’ said Usha Thorat, former deputy governor of the Reserve Bank of India. “This bill will also look to clarify some infirmities in the present scheme and provide uninsured depositors preference over other creditors. The resolution corporation will be under the finance ministry unlike the DICGC (Deposit Insurance and Credit Guarantee Corp) which is under the RBI.”
A separate law to wind down institutions in the financial services is in the works in line with global developments where many countries have evolved special laws post the collapse of Lehman Brothers in 2008 which roiled the global financial system.
The Bill is currently with a Parliamentary standing committee and there is no clarity on when the bill would wind its way to lawmakers for a vote. The Deposit Insurance Corporation and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI, was formed in 1961. Banks have to mandatorily take deposit insurance which covers individual deposits up to Rs 1 lakh. The DICGC manages the Deposit Insurance Fund (DIF) which is made up of the premium received from in-sured banks and coupon received from investment in central government securities.
The deposit insurance scheme currently covers all banks, commercial, regional rural and co-operative banks. So far in 2017, more thanRs 28 crore was sanctioned from the insurance scheme to all co-operative banks according to information on the DICGC website.

“The present deposit insurance scheme will be subsumed by the new Bill, but the Rs 1 lakh deposit insurance amount will not change,’’ said Sandeep Parekh managing partner at Finsec Law Advisors. “To be precise, no commercial bank has been allowed to go down in India in the last 70 years and that implicit sovereign guarantee continues even with this new Bill.”

The bill proposes to establish a resolution corporation to monitor financial firms and oversee the liquidation, which was not the case in so far. The RBI which has been in charge of bank liquidations or resolutions will also no longer be in charge.

“Unlike the present scheme, which was only restricted to banks, the new Bill will cover resolution of all financial institutions. This Bill will also look to clarify some infirmities in the present scheme and provide uninsured depositors preference over other creditors,” Thorat said.

Neither the government nor the RBI or any other financial regulator has said by when this would become a law, or in what form.