Centre plans new FRDI Bill, hike in deposit insurance

New Delhi: With several financial institutions in the country standing on the edge of distress, the Central government is likely to increase insurance cover for bank deposits. Currently, only Rs 1 lakh deposit of each customer is issured.

The Finance Ministry is also mulling to re-look at the most contentious Financial Resolution and Deposit Insurance (FRDI) Bill, a year after it was withdrawn by the government following a huge public outcry against controversial bail-in clause, which led to many depositors prematurely cancelling their bank deposits.

“The government wants to hike the insurance cover of customers of a failed financial institution from Rs 1 lakh per depositor at present. We are redrafting the FRDI Bill, and it will be circulated for inter-ministerial consultation soon,” a top Finance Ministry source told Financial Chronicle.

The move comes at a time when financial institutions, especially NBFCs like Infrastructure Leasing & Financial Services and Dewan Housing Finance Corporation (DHFL) and co-operative banks like Punjab and Maharashtra Co-operative Bank, are showing signs of financial distress.

Nevertheless, the government took immediate measures by resolving all the ailing non-financial firms through Insolvency and Bankruptcy Code (IBC), but it does not cover deposit-taking financial companies.

Under the current bank deposit insurance scheme, in case of an unlikely bank failure, deposits up to Rs 1 lakh are insured and paid back to the depositor by Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the Reserve Bank of India.

While DICGC insures all types of deposits at commercial banks and cooperative banks, it does not cover deposits made with depost-taking NBFCs.

The source further said DICGC has proposed to hike deposit insurance to Rs 3 lakh from Rs 1 lakh, depending upon the demands of circumstances.

“It won’t happen overnight, rather it will take some time as the proposal is under the discussion stage at the Finance Ministry. The hike will only happen after taking a consensus from all stakeholders including DICGC and RBI,” said the source.

As far as the deposit insurance cover is concerned, it was last hiked in May 1993 to Rs 1 lakh from Rs 30,000 in July 1980. At the end of FY19, the number of registered insured banks stood at 2,098, comprising 157 commercial banks and 1,941 cooperative banks.

“The government will also examine the issues related to the controversial ‘bail-in’ clause in the earlier Bill, and it would explore hiking the deposit insurance cover of customers, and decide whether the resolution framework should apply to public sector banks,” the source added.

Late Finance Minister Arun Jaitley had in Aug’17 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 also thought of setting up of an independent resolution corporation for carrying out speedy and efficient resolution of financial firms in distress for which the Bill was referred to a joint committee of Parliament then.

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 of the Bill and due to conflict of opinions with various regulators, including RBI.

According to the ‘bail-in’ clause, which was proposed for 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 and was one of many resolution tools in FRDI Bill, including acquisition and merger.