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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. Order of priority under liquidation

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.

As of April 17, Madhya Pradesh has 1,120 confirmed cases of COVID-19 - the fifth-highest among all states in India.  The Government of Madhya Pradesh issued one of its initial COVID-19 related orders around January 28, 2020, advising healthcare workers to use appropriate protective gear when examining patients from Wuhan, China.   Since then, the government has taken several actions to contain the spread and impact of COVID-19.  In this blog, we look at key measures taken so far.

Figure 1: Day-wise COVID-19 cases in Madhya Pradesh

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Early stages: Focus on screening international travellers

On January 28, the state government issued directions to monitor international travellers from specified countries, test and maintain surveillance on those who are symptomatic.  A further order required district administrators to monitor and report on all passengers who arrived from China between December 31, 2019 and January 29, 2020.  While efforts were largely focused on screening and testing, the first quarantine restrictions for symptomatic travellers from China, entering India after January 15, were imposed on January 31.  Those leaving quarantine were subsequently kept under surveillance and their health conditions reported on for a period of 14 days.  By February 13, a constant presence of a medical team at the airport was required to test foreign passengers from an increasing list of countries and send daily reports.  

February and early March: Improving public health capacity, restricting social gatherings

The next steps from the government were aimed towards adapting the public health infrastructure to handle the evolving situation.  Following are some of the steps taken in this regard:

  • A helpline, with a dedicated call centre, was set up to inform citizens about COVID-19 and its prevention.
  • The regional directors of the Directorate of Health Services, Government of Madhya Pradesh, were instructed to ensure availability of N-95 masks and PPE kits in their region.
  • The Health Department issued guidelines to the Chief Medical and Health Officials in the State regarding the collection and transport of COVID-19 test samples.
  • Medical professionals in public hospitals were ordered to attend a national training.
  • An order was issued to improve arrangements for quarantine and isolation wards.
  • Leaves were cancelled for all employees/officers of the Health Department. 
  • To grant certain rights to establish effective control over outbreak affected areas and take swift actions, section 71 of the Madhya Pradesh Public Health Act, 1949 was invoked.  This section of the Act provides all Chief Medical and Health Officers and Civil Surgeon cum Chief Hospital Superintendents rights set out therein.  

As the number of cases in India increased through March, the MP government turned focus and issued orders directly concerning their citizens.   Several measures were undertaken to spread awareness about COVID-19 and implement social distancing.  

  • dedicated portal was created for COVID-19 related information.  
  • An order was issued to close several establishments including schools, colleges, cinema halls, gyms and swimming pools.  Biometric attendance was stopped at all government workplaces. 
  • On March 20, the government issued an order (effective till June 15) requiring suppliers of masks and sanitizers to: (i) maintain a fixed price and (ii) keep and present fortnightly, a record of purchase and sales of the essential items.  The order also prevented them from refusing to sell to any customer. 

March 21 Onwards

On March 21, MP reported four cases of COVID-19. On March 23, the government released the Madhya Pradesh Epidemic Diseases, COVID-19 Regulations 2020 to prevent the spread of COVID-19 in the state.  These regulations specify special administrative powers and protocol for hospitals (government and private) to follow while treating COVID-19 patients. These regulations are valid for one year. Over and above general instructions to maintain social distancing and personal hygiene, the government has undertaken specific measures to: (i) increase healthcare capacity, (ii) institute welfare protection for the economically vulnerable population, (iii) strengthen the administrative structure and data collection, and (iv) ensure supply of essential goods and services.  These measures include-

Healthcare measures

  • Preparation of hospitals for the treatment of COVID-19 including postponing elective surgeries, ensuring an adequate supply of PPE kits. 
  • On March 28, the Bhopal Memorial Hospital and Research Centre was designated as a state-level COVID-19 hospital.  This order was reversed on April 15. 
  • District collectors were empowered to appoint doctors and other healthcare workers as required in their districts in a fast-tracked manner.
  • Establishing a telemedicine unit in each of the 51 district hospitals
  • Facilitating the appointment of final year undergraduate nursing students as nurses
  • On March 29, the government launched the SAARTHAK app for daily monitoring and tracking of quarantined and corona positive patients
  • The government released a strategy document to contain COVID-19. This strategy places emphasis on identification of suspected cases, isolation, testing of high-risk contacts, and treatment (called the I. I. T. T. strategy)

Welfare measures

  • One-time financial assistance of Rs 1,000 will be provided to construction labourers
  • One-time financial assistance of Rs 2,000 will be provided to families of Sahariya, Baiga and Bharia tribes
  • Social security pensions for two months will be paid in advance to pensioners
  • People without eligibility slips under the National Food Security Scheme to be allowed to receive ration 

Administrative measures

  • Senior officials were designated to coordinate with various states to resolve issues regarding migrant labour.
  • District Crisis Management groups were formed to coordinate state-level policy and the local implementation machinery.

Supply of essential goods and services

  • On April 8, the government implemented the Essential Services Management Act,1979. The Act among other things, prohibits anyone employed in essential services to refuse to work.
  • E-pass procurement facility was started to ensure smooth inter-district and across states flow of essential goods & services.  

For more information on the spread of COVID-19 and the central and state government response to the pandemic, please see here.