The Financial Resolution and Deposit Insurance Bill, 2017 was introduced in Lok Sabha during Monsoon Session 2017. The Bill is currently being examined by a Joint Committee of the two Houses of Parliament. It seeks to establish a Resolution Corporation which will monitor the risk faced by financial firms such as banks and insurance companies, and resolve them in case of failure. For FAQs explaining the regulatory framework under the Bill, please see here.
Over the last few days, there has been some discussion around provisions of the Bill which allow for cancellation or writing down of liabilities of a financial firm (known as bail-in).[1],[2] There are concerns that these provisions may put depositors in an unfavourable position in case a bank fails. In this context, we explain the bail-in process below.
What is bail-in?
The Bill specifies various tools to resolve a failing financial firm which include transferring its assets and liabilities, merging it with another firm, or liquidating it. One of these methods allows for a financial firm on the verge of failure to be rescued by internally restructuring its debt. This method is known as bail-in.
Bail-in differs from a bail-out which involves funds being infused by external sources to resolve a firm. This includes a failing firm being rescued by the government.
How does it work?
Under bail-in, the Resolution Corporation can internally restructure the firm’s debt by: (i) cancelling liabilities that the firm owes to its creditors, or (ii) converting its liabilities into any other instrument (e.g., converting debt into equity), among others.[3]
Bail-in may be used in cases where it is necessary to continue the services of the firm, but the option of selling it is not feasible.[4] This method allows for losses to be absorbed and consequently enables the firm to carry on business for a reasonable time period while maintaining market confidence.3 The Bill allows the Resolution Corporation to either resolve a firm by only using bail-in, or use bail-in as part of a larger resolution scheme in combination with other resolution methods like a merger or acquisition.
Do the current laws in India allow for bail-in? What happens to bank deposits in case of failure?
Current laws governing resolution of financial firms do not contain provisions for a bail in. If a bank fails, it may either be merged with another bank or liquidated.
In case of bank deposits, amounts up to one lakh rupees are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). In the absence of the bank having sufficient resources to repay deposits above this amount, depositors will lose their money. The DICGC Act, 1961 originally insured deposits up to Rs 1,500 and permitted the DICGC to increase this amount with the approval of the central government. The current insured amount of one lakh rupees was fixed in May 1993.[5] The Bill has a similar provision which allows the Resolution Corporation to set the insured amount in consultation with the RBI.
Does the Bill specify safeguards for creditors, including depositors?
The Bill specifies that the power of the Corporation while using bail-in to resolve a firm will be limited. There are certain safeguards which seek to protect creditors and ensure continuity of critical functions of the firm. 
When resolving a firm through bail-in, the Corporation will have to ensure that none of the creditors (including bank depositors) receive less than what they would have been entitled to receive if the firm was to be liquidated.[6],[7]
Further, the Bill allows a liability to be cancelled or converted under bail-in only if the creditor has given his consent to do so in the contract governing such debt. The terms and conditions of bank deposits will determine whether the bail-in clause can be applied to them.
Do other countries contain similar provisions?
After the global financial crisis in 2008, several countries such as the US and those across Europe developed specialised resolution capabilities. This was aimed at preventing another crisis and sought to strengthen mechanisms for monitoring and resolving sick financial firms.
The Financial Stability Board, an international body comprising G20 countries (including India), recommended that countries should allow resolution of firms by bail-in under their jurisdiction. The European Union also issued a directive proposing a structure for member countries to follow while framing their respective resolution laws. This directive suggested that countries should include bail-in among their resolution tools. Countries such as UK and Germany have provided for bail-in under their laws. However, this method has rarely been used.7,[8] One of the rare instances was in 2013, when bail-in was used to resolve a bank in Cyprus.
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[1] ‘Modi government’s FRDI bill may take away all your hard-earned money’, India Today, December 5, 2017, http://indiatoday.intoday.in/story/frdi-bill-banking-reforms-modi-government-india-parliament/1/1103422.html.
[2] ‘Bail-in doubts — on financial resolution legislation’, The Hindu, December 5, 2017, http://www.thehindu.com/opinion/editorial/bail-in-doubts/article21261606.ece.
[3] Section 52, The Financial Resolution and Deposit Insurance Bill, 2017.
[4] Report of the Committee to Draft Code on Resolution of Financial Firms, September 2016, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/FRDI%20Bill%20Drafting%20Committee%20Report.pdf.
[5] The Deposit Insurance and Credit Guarantee Corporation Act, 1961, https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/dicgc_act.pdf. s
[6] Section 55, The Financial Resolution and Deposit Insurance Bill, 2017.
[7] The Bank of England’s approach to resolution, October 2014, Bank of England.
[8] Recovery and resolution, BaFin, Federal Financial Supervisory Authority of Germany, https://www.bafin.de/EN/Aufsicht/BankenFinanzdienstleister/Massnahmen/SanierungAbwicklung/sanierung_abwicklung_artikel_en.html.
The right to food and food security have been widely discussed in the media. The National Food Security Bill, 2011, which makes the right to food a legal right, is currently pending in Parliament. The Bill seeks to deliver food security by providing specific entitlements to certain groups of individuals through the Targeted Public Distribution System, a large-scale subsidised foodgrain distribution system. The Standing Committee on Food, Consumer Affairs and Public Distribution presented its report on the Food Security Bill on January 17, 2013. It made recommendations on key issues such as the categorisation of beneficiaries, cash transfers and cost sharing between the centre and states. A comparison of the Bill and Committee’s recommendations are given below.
|
Issue |
Food Security Bill |
Standing Committee’s Recommendations |
| Who will get food security? | 75% of the rural and 50% of the urban population (to be divided into priority and general categories). Of these, at least 46% of the rural and 28% of urban populations will be priority (the rest will be general). | Uniform category: Priority, general and other categories shall be collapsed into ‘included’ and ‘excluded’ categories.Included category shall extend to 75% of the rural and 50% of the urban population. |
| How will they be identified? | The centre shall prescribe guidelines for identifying households; states shall identify the specific households. | The centre should clearly define criteria for exclusion and consult with states to create inclusion criteria. |
| What will they get? | Priority:7 kg foodgrains/person/month (at Rs 3/kg for wheat, Rs 2/kg for rice, Rs 1/kg for coarse grains).General: 3 kg foodgrains/person/ month (at 50% of MSP). | Included: 5 kg foodgrains/person/month (at subsidised prices). Pulses, sugar, etc., should be provided in addition to foodgrains. |
| Reforms to TPDS | Doorstep delivery of foodgrains to ration shops, use of information technology, etc. | Implement specific IT reforms, for e.g. CCTV cameras in godowns, use of internet, and GPS tracking of vehicles carrying foodgrains. Evaluate implementation of TPDS every 5 yrs. |
| Cost-sharing between centre and states | Costs will be shared between centre and states. Mechanism for cost-sharing will be determined by the centre. | Finance Commission and states should be consulted regarding additional expenditure to be borne by states to implement the Bill. |
| Cash Transfers | Schemes such as cash transfer and food coupons shall be introduced in lieu of foodgrains. | Cash transfers should not be introduced at this time. Adequate banking infrastructure needs to be set up before introduction. |
| Time limit for implementation | The Act shall come into force on a date specified by the centre. | States to be provided reasonable time limit i.e., 1 year, after which Act will come into force. |
To access the Bill, a detailed comparison of the Standing Committee recommendations and the Bill, and other relevant reports relevant, see here.
