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.
———————————————–
[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.
| This month, PRS Legislative Research is 5 years old! The objective when we started out was to make the legislative process in India better informed, more transparent and participatory. From what started off as an idea, we believe we have made some progress towards our objective. - About 250 MPs across political parties have reached out to PRS for inputs on a range of issues that have come up in Parliament. In addition, there are a number of MPs who use PRS material for their preparation in Parliament, even though they have not contacted PRS for further inputs. - PRS has increasingly become a resource for the media as well. Over the past year, PRS has been cited on nearly 400 occasions by leading newspapers and websites as the source of information about legislation and Parliament. These are some of the milestones that we feel happy to have reached. But I want to really share are some of the learnings that we have had over these years. The first thing that we have learned is that many of us carry so many wrong perceptions about our MPs. Most of us don’t know that more than 80 percent of our MPs have college degrees. Most of us don’t know that the average attendance rate in Parliament is close to 80 percent in the past year. Most of us don’t know that Parliament has worked for more than 90 percent of the scheduled time in recent sessions, despite the undesirable disruptions in Parliament. There is a lot that is wrong with our politics, but we hope that some of these facts throw light about some lesser known aspects about our MPs. Laws are made for the really long term! That seems obvious, when we see examples such as our Indian Penal Code which was made in 1860, and the Land Acquisition Act that has haunted our country in recent years was passed in 1894. And these are just some examples. The fact is that if we do not debate our laws when they are being made, and citizens do not engage and provide inputs to this process, then we will be stuck with any issues that these laws might have for the next 100 years or more. So it is critical to get the laws as close to ‘right’ as possible when they are being passed. It is not obvious to most people that so many MPs put in significant effort to engage effectively in Parliament. Clearly, there is a selection bias, statistically speaking – I am talking of MPs who have reached out to us. Despite this selection bias, the point is that there are a number of MPs who take their work in Parliament seriously, even though they know that much of the work they do in Parliament has almost no bearing on their re-election prospects. (By the way, in most informal polls that I have done when I meet with groups of people, most do not know the role of an MP – even amongst some of the well educated groups.) Why do so many MPs still work hard to prepare for their work in Parliament, despite knowing that this work has no bearing on their re-election prospects? On this, we can only hypothesize. There are many MPs who understand their role as legislators and take it very seriously. There are MPs who feel that making a good point on an issue on the floor of Parliament is a way to establish their grasp of a certain issue to their colleagues in Parliament, but also to the larger world. For some others, it is a signalling device to their party colleagues about their interest and expertise in a certain subject area. And we have had MPs who have said, that they feel very good when other MPs, especially from other parties, compliment them for making a good point. All of these sound like good positive reasons for many MPs to want to be well prepared to speak in Parliament. We have begun to appreciate that the role of the MP in Parliament is very challenging. I can point to at least three reasons, which are independent of how educated or capable an MP might be: (a) The range of subjects in Parliament is so wide that no individual, however intelligent, can be fully conversant with all the subjects being discussed. (b) MPs have no research staff whatsoever, and are expected to do all of their preparatory work on their own, and (c) The constituency pressure on the MPs is often very high, making it difficult for them to pay adequate attention to their work in Parliament. We most certainly want more from our MPs and our Parliament. We want our MPs to meet for more days, find better ways to raise issues in Parliament than to disrupt proceedings, debate in more detail the laws that they pass. But what we have learned is that we cannot throw the baby out with the bath water. So, I am not suggesting that we can’t do better or that our MPs or our Parliament are perfect. The only way we will have a better Parliament is if we engage. And more people engage – from all walks of life. Policy making is not the exclusive preserve of either the expert or the policy maker. The policy process can be greatly strengthened if we participate in the process and ensure that our MPs know that we want effective laws to govern us and our children. Parliament can be made more effective by addressing some of the current bottlenecks. And some of these issues are not even difficult to fix. For example, can we have more people in the committee staff to support the work of the standing committees in Parliament so they can cover more ground in any given year? Can we have qualified research staff working for MPs so that they can go better prepared for Parliament? (Our Legislative Assistants to MPs – LAMPs programme has shown that it is hugely rewarding for young legislative assistants and the MPs if such a platform is created.) Can we have recorded voting on all legislative votes, instead of voice votes – the electronic button system is already in place to do this! These are just some examples… and we at PRS have a laundry list of ideas for strengthening Parliament – with varying degrees of difficulty. We have raised some of these issues in our Annual Conference of Effective Legislatures, and will continue to do so in the years ahead. A very BIG thanks to each of you for making PRS possible over these past five years… We hope that you will continue to bless and support us in the years ahead to help shape a more robust policy making process in India. | PRS PRODUCTS The Legislative Briefs are our flagship product. Each Brief analyses one Bill pending in Parliament. These are no longer than 6 pages and are sent to all MPs. We then get calls from MPs asking for more information/ clarification. Since earlier this year PRS has begun a Wednesday morning Policy Dialogue series exclusively for MPs. These are widely attended by MPs across parties. PRS is the knowledge partner to brief MPs in the Thursday morning Bill briefing sessions organised by the Constitution Club. PRS has reached out to about 1000 journalists across the country, through journalist workshops and direct engagement. PRS has started the Legislative Assistants to MPs (LAMPs) programme as a pilot initiative. Under the programme, participating MPs get a trained legislative assistant for a period of three Parliament sessions. PRS produces Primers to demystify Parliamentary process for citizens. These are widely used in our interactions with civil society groups. The Vital Stats series is a crisp two page document that often highlights interesting aspects of Parliament. They are very popular with journalists. PRS has nearly 1000 fans on Facebook and 2000 followers on Twitter, including some MPs. PRS has a Session Alert at the beginning of each session of Parliament. On the last day of each session, PRS releases two reports on the just concluded session: Parliament Session Wrap and Plan vs. Performance. PRS hosts an Annual Conference of Effective Legislatures each year to highlight certain aspects of the functioning of Parliament. PRS has compiled a free online database of all state laws across the country. This effort www.lawsofindia.org is the first effort of its kind in India. The PRS website www.prsindia.org has become an important resource for anyone tracking the Indian Parliament both within the country and abroad. |
