The FRDI Bill is intended to lay down the rules on how the problem should be resolved when a bank(or any other financial firm)defaults on its payments.Indian laws relating to bank failure are fragmented.This Bill unifies them and lays down a standard procedure.The Bill asks the government to set up a new Resolution Corporation(RC) to monitor banks to spot early signs of trouble and quickly resolve them.In case a bank is 'critical',the RC can try to rescue it through various methods.A bail-in is one of the options.
In the past,when large financial firms failed in India,they were either rescued by the Government pumping in money(UTI's US-64)or by the RBI merging the ailing firm with a healthy one(Global Trust Bank with Oriental Bank of Commerce).A bail-in is a solution wherein the bank's own lenders are asked to make sacrifices to keep the bank running,instead of the Government pumping in taxpayer money.The bail-in clause allows the RC to cancel any of the bank's dues or modify terms.Loans,here,can include deposits from account holders.
Clause 52 says that bail-ins cannot affect deposits that are covered by deposit insurance.But deposits beyond the insurance limit can be subject to bail-in,subject to two conditions.One,the bank has to incorporate a bail-in clause into your contract at the time of signing up for a deposit.Hence bail-in provisions cannot affect your existing bank deposits.Two,the RC has powers to select specific instruments that will be exempted from bail in.These regulations will be framed after the FRDI Bill becomes law.
Presently,deposits in Indian banks are insured by the Deposit Insurance and Credit Guarantee Corporation(DICGC) to the extent of Rs1lakh per bank.The Rs1 lakh limit includes both your principal and any accumulated interest across different types of accounts(savings,FD,RD).
If the bank goes belly up,you are guaranteed this money,sums beyond this are not guaranteed.However,the FRDI Bill plans o dissolve the DICGC and hand over the deposit insurance role to the RC.The RC ill be tasked with providing the insurance cover and setting the new insurance limits.As the RC is yet to be created,the new deposit insurance amount is unknown.
A bail-in was used against depositors in Cyprus and many developed nations have laws allowing it after the credit crisis of 2008 but except for Cyprus no other country has actually used it.After the balance of payments crisis in the early nineties,India has vastly improved its debt position and is nowhere close to a Cyprus like situation.
The FRDI Bill is being examined by a parliamentary committee.
Source:The Hindu
In the past,when large financial firms failed in India,they were either rescued by the Government pumping in money(UTI's US-64)or by the RBI merging the ailing firm with a healthy one(Global Trust Bank with Oriental Bank of Commerce).A bail-in is a solution wherein the bank's own lenders are asked to make sacrifices to keep the bank running,instead of the Government pumping in taxpayer money.The bail-in clause allows the RC to cancel any of the bank's dues or modify terms.Loans,here,can include deposits from account holders.
Clause 52 says that bail-ins cannot affect deposits that are covered by deposit insurance.But deposits beyond the insurance limit can be subject to bail-in,subject to two conditions.One,the bank has to incorporate a bail-in clause into your contract at the time of signing up for a deposit.Hence bail-in provisions cannot affect your existing bank deposits.Two,the RC has powers to select specific instruments that will be exempted from bail in.These regulations will be framed after the FRDI Bill becomes law.
Presently,deposits in Indian banks are insured by the Deposit Insurance and Credit Guarantee Corporation(DICGC) to the extent of Rs1lakh per bank.The Rs1 lakh limit includes both your principal and any accumulated interest across different types of accounts(savings,FD,RD).
If the bank goes belly up,you are guaranteed this money,sums beyond this are not guaranteed.However,the FRDI Bill plans o dissolve the DICGC and hand over the deposit insurance role to the RC.The RC ill be tasked with providing the insurance cover and setting the new insurance limits.As the RC is yet to be created,the new deposit insurance amount is unknown.
A bail-in was used against depositors in Cyprus and many developed nations have laws allowing it after the credit crisis of 2008 but except for Cyprus no other country has actually used it.After the balance of payments crisis in the early nineties,India has vastly improved its debt position and is nowhere close to a Cyprus like situation.
The FRDI Bill is being examined by a parliamentary committee.
Source:The Hindu
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