Financial Resolution and Deposit Insurance Bill, 2017: An Analysis.

[Shajal Sarda]

The author is a fourth-year student at National Law Institute University, Bhopal.

The Financial Resolution and Deposit Insurance Bill, 2017 (hereinafter referred to as the “Bill“) proposed by the government attempts at providing for a comprehensive law for the resolution and restoration of financial/covered service providers who are classified under certain heads of risk to viability with respect to the timely payment of their liabilities.

The Bill provides for the establishment of the Resolution Corporation whose general direction and management shall be done by a board which, in consultation with the appropriate regulator, shall lay down the objective criteria to classify covered service providers in terms of their viability into five categories viz. low, moderate, material, imminent and critical.[1] The appropriate regulator, after inspection or otherwise, shall classify the covered service provider under one of the categories mentioned above.[2] Based on the category of the covered service provider with respect to the risk to viability, the covered service provider shall be asked to submit a resolution plan to the resolution corporation and a restoration plan to the appropriate regulator under the Bill.[3]

The Bill provides for various methods or combinations thereof that can be adopted for the resolution of the covered service provider under the risk category above moderate.[4] These methods can be transfer of the whole or part of the assets or liability of the service provider to another person under the terms agreed upon by the corporation, merger or amalgamation, creation of a bridge service provider as per section 50 of the Bill, acquisition of the service provider, or bail-in in accordance with section 52 of the Bill.[5]

The Resolution Corporation shall replace the present Deposit Insurance and Credit Guarantee Corporation (DICGC), a Reserve Bank of India subsidiary which insures all kinds of deposits with the banks up to an amount of Rs. 1 lakh. Till now, it has been mandatory for the banks to pay an amount as premium to DICGC for the insurance of deposits.[6] The Resolution Corporation has been endowed with the same function under the Bill, though the amount of deposit insurance has not been specified, something which the Board is required to do in consultation with the appropriate regulator.[7]

Purpose of the Bill

The government has time and again attempted to increase the trust of consumers in the credit delivery system and create a business friendly environment. The biggest example is the Insolvency and Bankruptcy Code, 2016, which aims to provide a comprehensive and exhaustive code for the insolvency resolution of corporate entities, partnerships and sole proprietorships. The Code was enacted to provide for a speedy and efficient resolution of the claims of unpaid creditors. Other examples include the opening of Jan Dhan accounts and recapitalisation of banks.

Statistical data reveals that, in public sector banks, private sector banks and foreign banks, the gross non-performing assets to total advances ratios stands at 9.39%, 2.90% and 4.26% in the financial year 2016.[8] If the banks are not being paid by their debtors, the former in turn may not be able to perform their obligations; therefore arises the problem of trust in the banking system at large. Further, only secured credit dominates the credit market in the country; therefore, the credit analysis of the business prospects of the firm has shrivelled.[9] Hence, it has become important for the government to introduce comprehensive reforms in the banking system. Accordingly, the present Bill enables resolution of banks- which are on the verge of failure with respect to payment of their obligation- by providing for a framework of resolving the risk of failure of banks to pay their obligations.

Concerns over the Bail-In Provision

Section 52 of the Bill provides for bail-in as a method for resolution of banks. A bail-in provision may provide for any or a combination of the following: (a) cancelling of the liability of the bank; (b) modification of the form of liability owed by a covered service provider; (c) provision that a contract or service under which a covered service provider has a liability is to be treated as if a specified right has been provided under the contract.[10] The Corporation shall specify the liability or the class of liabilities that may be subject to a bail in. The provisions of this section shall not apply to deposits to the extent they have been insured,[11] and shall not cover any liability owed to workmen including pension.[12] Further, it is to be noted that the definition of deposit in the Bill does not include deposit made by the Government of India or any state government or foreign government, though the provisions may apply to any liability created under a contract with the three above-mentioned entities. Whenever the Corporation invokes a bail-in provision, a report regarding the bail-in stating the need for the bail-in and the consequences of the bail-in must be sent to the Central Government.[13] Further, a copy of such report must be laid before both the Houses of Parliament.[14]

The concerns regarding these provisions are that they have created higher risks for the depositors. Previous examples of bail-ins include the bail-in made under the resolution of the Bank of Cyprus in which the depositors had to face a 47.5% haircut in their deposits. ASSOCHAM has raised an argument that deposits such as fixed deposits and saving deposits must not be considered as similar to other liabilities owed by banks because this may reduce the trust of people in the banking system in light of the rising healthcare prices, among other things.[15] On the other hand, an argument in favour of the bail-in provision is that, in the absence of such provision, the government, in order to recapitalise a bank, may use the tax payers’ money, print more notes or borrow money, which will result in inflation and thus a reduction in the interest rates on the deposits.[16] Further, the system created through the Bill is a process-driven system which creates transparency, and bail-in is just one method which may be used for the resolution of a bank if any other method does not work.

Reference must be made here to the European Union Bank Recovery and Resolution Directive (BRRD), passed in 2014, whereby the EU Member States were required to adopt implementing legislation to confer on bank regulators the power to write down, modify the terms of, cancel completely and/or convert into equity the liabilities of a failing bank before it becomes insolvent.[15] Similarly, the G20 at its Cannes Summit in 2011 endorsed some of the key attributes of such resolution, including transfer or sale of assets and liabilities, and legal rights and obligations including deposits liabilities and ownership in shares, to a third party without any requirement for consent.[16]

Conclusion

The Bill seeks to lay down a comprehensive system for the resolution of ailing banks that are in a material, imminent or critical risk of not being able to pay their liabilities in future. The Bill provides for various methods for the resolution of the banks covered under the risk. One of the methods is a bail-in instrument. The concept of a bail in provision has been recognised in various countries and is seen as better than a bail out instrument while evaluating the economic consequences of the latter. Though the consent of the concerned depositors is not needed before invoking a bail-in instrument, there is a process that must be followed by the Resolution Corporation under the Bill before invoking such an instrument. The bail-in clause per se is not a problem; the problem may lie in its implementation. If a bail-in instrument is made without taking into consideration all the socio-economic elements, it may lead to serious financial consequences which may hamper the economy as a whole.

References

[1] Section 37(1), Financial Resolution and Dispute Insurance Bill, 2017.

[2] Section 38, Financial Resolution and Dispute Insurance Bill, 2017.

[3] Section 39, Financial Resolution and Dispute Insurance Bill, 2017.

[4] Section 48, Financial Resolution and Dispute Insurance Bill, 2017.

[5] Ibid.

[6] Section 15, The Deposit Insurance and Credit Guarantee Corporation of India Act, 1961.

[7] Section 29, Financial Resolution and Dispute Insurance Bill, 2017

[8] Reserve Bank of India (RBI), IBA, TechSci Research, available at, https://www.ibef.org/download/Banking-June-2017.pdf.

[9] Page No. 10, Bankruptcy Law Reforms Committee Report, 2015

[10] Section 52(3), Financial Resolution and Dispute Insurance Bill, 2017.

[11]Section 52(7)(a), Financial Resolution and Dispute Insurance Bill, 2017.

[12] Section 52(7)(f), Financial Resolution and Dispute Insurance Bill, 2017.

[13] Section 52(8), Financial Resolution and Dispute Insurance Bill, 2017.

[14] Section 52(9), Financial Resolution and Dispute Insurance Bill, 2017.

[15] ASSOCHAM asks govt to remove bail-in from FRDI Bill, says bank deposits only financial security of pensioners, Business Today, available at, http://www.businesstoday.in/current/economy-politics/assocham-govt-remove-bail-in-frdi-bill-bank-deposits-only-financial-security-pensioners/story/266018.html

[16] FRDI Bill’s bail-in clause: Two options for the government, Livemint, available at, http://www.livemint.com/Opinion/sUThI1tG8gY0LRaokkf0RI/Bail-in-two-options-for-the-government.html.

[17] FRDI Bill: What is a bail-in, and are your bank deposits actually at risk, Financial Express, available at, http://www.financialexpress.com/economy/frdi-bill-what-is-a-bail-in-and-are-your-bank-deposits-actually-at-risk/968884/.