It's the equivalent of Insolvency Act for Banks. The ‘Insolvency & Bankruptcy Act’ deals with insolvency for corporates (all the current bad loan recoveries are being pursued under this act – one of the reasons India moved up on ease of doing business). This is the equivalent for banks, NBFCs, microfinance institutions and insurance companies.
Previously these were dealt with under difference acts which in most instances were lagging. The government is now putting it in one single law to deal with insolvencies. Everyone remembers the years it took to get back money from failed NBFCs. This law should make insolvency & recovery time bound (Its2 years).
As a part of consolidating all existing law it will close down the DICGC deposit guarantee scheme & merging it with the new act - one of the reasons for the fear. This scheme guarantees up to Rs.1 lakh of the bank deposits currently. The Rs.1 lakh guarantee will continue under the FRDI bill.
Read the fine prints of your pass books/ FD certificates and you will understand the deposit guarantee (cumulative of SB/ CA/ FD) is capped Rs.1 lakh. However, even when banks failed in the past (Global Trust Bank/ Nedungadi Bank/ Benares State Bank & many more), the government/ RBI ensured depositors did not loose by merging these banks with good banks. But strictly if they were to be closed depositors would have lost money in all the above instances.
Even now deposits (SB/ FD) are unsecured. As with any recovery process the order of recovery even now is
resolution costs (liquidator fees)
taxes and regulatory dues (can change between employees
employees’ salaries (various categories)
secured creditors
unsecured creditors
subordinated creditors
preference share-holders and lastly the equity share holders
This position of unsecured creditors (which is how depositors are classified) remains same in the existing and the proposed rules.
(some mistakes in this article on categorization but the point is if you look at the above article the position of depositors does not change. So not sure why the hue & cry)
The bail in & insolvency process becomes more efficient and time-bound which is the difference. The FRDI bill will allow faster recovery in case of failure of NBFCs and benefits customers.
The only difference the FRDI bill makes is the time-bound nature of resolution; technically making its technically easier (in terms of process) to write-off liabilities (creditors/ depositors) in case of re-structuring. If you look at it from time value of money perspective, this will be better.
What to watch for:
Any changes to deposit insurance amount.
We should be careful not to assume that deposits with any government (PSU) bank are same. The very fact that despite all of them being PSU banks they pay different interest rates indicate the risks are different.
That’s the reason SBI’s/ HDFC’s/ Axis/ BoB of the world pay much lower interest rate compared to the likes of Vijaya/ United/ IOB/ Indian/ OBC/ IDBI. The last few are weak and in trouble (deep shit if I have to be blunt). While it is safe to assume that the government/ RBI will not let them fail, the way you will not invest all your money in Sahara but prefer Sundaram Finance, we should not keep all our money in the weak banks but keep part of it in the stronger banks.
So to me nothing has changed and nothing will change in the next 3 years, not with elections in 2019. Also let’s not forget the government has allowed a bail-out already for the banks. That will be sufficient and no bail-in’s will be required.