We’ll tell you in simple terms what the FRDI Bill and the bail-in clause are. It might help you decide whether or not to rework your financial portfolio.
“It’s because of people like you that rumours get spread,” said a young man to his father. The father had just mentioned that the Government had plans to use depositors’ money to bail-in failing banks. He had been making a reference to the much-discussed ‘bail-in clause’ in the Financial Resolution and Deposit Insurance Bill, 2017 (also called the FRDI Bill). Like many other people, he was concerned about the fate of his Fixed Deposits.
Rumour or not, people (especially retired people) are a little worried. This is because many of us have our savings in the form of bank deposits. So, the question on everybody’s mind is – “Is my money safe?”
While we won’t attempt to answer that question, what we will do is tell you, in simple terms, what the FRDI Bill and bail-in clause are. Once you understand this, you’ll be able to decide on the best way to distribute your investments. You’ll also be able to decide whether or not you should rework your financial portfolio.
Additional Reading: The Beginner’s Guide To Creating An Investment Portfolio
What is the FRDI Bill?
The FRDI Bill is a bill that intends to protect both depositors and employees. It aims to create a framework to resolve insolvency in banks and other financial institutions.
How does it intend to do this?
The Bill proposes to set up a Resolution Corporation. This Resolution Corporation will have the power to monitor financial institutions. It will also evaluate the stress that they’re under and take corrective measures if required.
It will classify these institutions under the categories of low, moderate, material, imminent and critical risk. If a financial institution is classified as ‘critical’, the Resolution Corporation will have the power to take control of it. It must resolve its issues within a year. The corrective measures taken could include a merger or acquisition, transfer of assets, liabilities to another firm, or even liquidation.
The current scenario
Currently, money which is deposited in a bank is insured up to Rs, 1,00,000. The Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary, looks after this. This amount will be paid to a depositor in case of liquidation of the bank.
The FRDI Bill proposes to do away with this body and have the Resolution Corporation take care of the credit guarantee for deposits.
Additional Reading: How Safe Are Your Fixed Deposits?
Here’s what might concern a depositor
According to the draft Bill, “The Corporation shall, in consultation with the appropriate regulator, specify the total amount payable by the Corporation with respect to any one depositor, as to his deposit insured under this Act, in the same capacity, and in the same right.”
The problem with this provision of the Bill is that it’s not very specific. It’s not clear what the insured amount will be. It also isn’t clear how much a depositor will be paid, should the bank or financial firm be liquidated.
The ‘worrisome’ bail-in clause
Moving on to the bail-in clause that’s a part of the FRDI Bill. Simply put, a bail-in is when depositors’ funds are used to support banks and financial institution that are in danger of failing. This is just the opposite of a bail-out where taxpayers’ money is used instead of the depositors’.
According to the FRDI Bill, the bail-in clause has a provision of “cancelling a liability owed by a specified service provider”. It also allows for the “modifying or changing the form of a liability owed by a specified service provider”.
This is the bit that seems to worries most people. Deposits can be considered to be a liability as the bank has to pay interest on them. And according to the drafting committee of the Bill, a bail-in can be used where it is necessary for the failing institution to continue with its services but it is not feasible to sell it.
Did my deposits just get riskier?
Not yet, as the FRDI Bill is not yet a law. Even if this Bill were to become a law, the risk associated with Fixed Deposits might not necessarily be higher than what it currently is.
As we mentioned before, the Bill still intends to insure deposits (even if it’s not clear what amount insured will be). And, as deposits are currently insured only up to one lakh per depositor per bank, any amount over that is still at risk, should the bank fail.
The objective of the FRDI Bill is to resolve insolvency in banks, insurance companies and other financial institutions. And the government claims that it is committed to protecting every depositor in public sector banks. Both the Finance Ministry and Prime Minister Modi have responded to depositors’ fears. They say that the proposed Bill does not remove the present protections given to depositors. It, in fact, provides additional protection and works in the interest of the consumer.
What are my investment options?
If you’re concerned about your deposits and are thinking about other investment options, you can consider investing in Mutual Funds, real estate or any other avenue.
Check this if you want to know the different areas you can invest in – Different Types Of Asset Classes
If you’re wondering how you should allocate your funds, click here to read an article on asset allocation.
Additional Reading: The Ultimate Financial Planning Guide
For those of you that are ready to move away from Fixed Deposits and dive into Mutual Funds, we’re here to help!