Prime Minister Narendra Modi had approved a proposal to introduce a Financial Resolution and Deposit Insurance Bill, popularly called FRDI Bill in June this year. The Joint Committee of Parliament will submit its report during the Winter Session of Parliament, which starts on December 15th 2017.
So what is the FRDI Bill? FRDI Bill aims to establish a "Resolution Corporation" which will classify service providers like banks and insurers, based on the risk of failure. The Resolution Corporation will also investigate the activities of banks and insurers.
So why is the FRDI Bill in the news? Let's find out. Want to know more on fixed deposits and savings bank accounts? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.
The aim of the FRDI Bill is to limit the adverse results of the failure of banks, insurers, NBFCs, pension funds and stock exchanges. Simply speaking...if banks and insurers fail, you and other citizens must not be affected.
The Opposition is saying that some of the provisions of the FRDI Bill are anti-poor and anti-people. They have put worth the view that people's money will be used to bail out banks which have a lot of NPAs (Non Performing Assets).
Finance Minister Arun Jaitley says this is not true and public deposits will be protected.
PM Narendra Modi wants to protect you and other citizens from the failure of banks, insurers, stock exchanges and pension funds. The Government doesn't want you to be affected by the failure of Too Big To Fail Banks and Insurers. FRDI 2017 along with the Insolvency and Bankruptcy Code, will give the procedure of winding up (shutting down) or reviving an ailing/sick Company.
Remember the Global financial crisis of 2008 where some pretty big banks and insurers collapsed in the USA and Europe? Millions of people across the World were affected by the financial crisis.
The Government doesn't want the failure of banks and insurers to affect you and other citizens of the country. With the Government encouraging you and other citizens to join the formal banking system after demonetization and PMJDY, it is very important that the Government protects your money, from the failure of banks and insurers.
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The FRDI Bill aims to set up a Resolution Corporation to replace the existing Deposit Insurance and Credit Guarantee Corporation (DICGC). The job of the Resolution Corporation is to monitor financial firms, anticipate the risk of failure of these firms, take corrective action if necessary and resolve problems in case of failure.
Under DICGC, you and other depositors in banks are insured up to a maximum amount of Rs 1 Lakh (Principal + Interest). The deposits you have in different branches of a bank, are aggregated to give you an insurance cover up to Rs 1 Lakh. DICGC insures you for savings deposits, fixed deposits, current deposits and recurring deposits.
So what's the problem? The new Financial Resolution and Deposit Insurance Bill, unlike the DICGC, does not specify the deposit insurance amount (maximum amount). It is believed that the deposit insurance amount will be higher than the Rs 1 Lakh under DICGC.
The DICGC protects your money and banks have to pay the deposit insurance premium. DICGC charges 10 paise for a Rs 100 deposit. For a Rs 1 Lakh deposit, the premium would be Rs 100. If the deposit insurance amount is hiked (increased to more than Rs 1 Lakh), banks would have increased costs. So banks are opposing this move.
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The controversy around the FRDI Bill is because of the word bail-in. While a bail-out means an external agency uses public funds to pump in capital/money into an ailing Company, bail-in uses your and other depositors money to revive say a bank.
With a bail-in, the bank liabilities get cancelled or this money can be converted into forms like equity. This has led to rumors that your money is being used to fund ailing banks with NPAs or banks which have lost money because of wrong lending decisions.
Take a look at this. DICGC gives deposit insurance only up to Rs 1 Lakh. If your bank fails, you anyway lose the remaining money. The FRDI bill has not specified how much would be the insured amount , but your guess is as good as mine, it won't be below Rs 1 Lakh, set way back in 1993. Besides, no public sector bank has ever gone bankrupt in 70 years of our independence. Even if a co-operative bank or a private bank has collapsed, RBI has merged them with bigger banks.
So...you definitely don't need to be worried. Be Wise, Get Rich.
Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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