Pass FRDI Bill to strengthen financial sector: IMF

The International Monetary Fund (IMF) has suggested India to bring in Financial Resolution and Deposit Insurance Bill to strengthen the financial sector of the country.

"While the application of the Insolvency and Bankruptcy Code to financial institutions is also a good initial step, the passage of the Financial Resolution and Deposit Insurance Bill that is currently under reconsideration will provide a more appropriate framework over the longer term", the Fund said in the minutes of the 2019 India Article IV Staff Report.

The Reserve Bank of India (RBI) in 1999 had in a report on reforms in deposit insurance in India had recommended to give the Deposit Insurance and Credit Guarantee Corporation (DICGC) powers to act as receiver and liquidator of failed banks.

This RBI recommendation was the cornerstone of the Financial Resolution and Deposit Insurance (FRDI) Bill in Parliament in August 2017. It was, however, withdrawn a year later after concerns about the bail-in clause, according to which depositors of a failing financial institution would have to bear part of the resolution cost and this was hugely protested by the depositors.

The Financial Stability and Development Council (FSDC) meeting headed by finance minister Nirmala Sitharaman had discussed last month the FRDI Bill. Sitharaman had earlier said the government will bring legislation on raising insurance cover on bank deposits from the current Rs 1 lakh and regulating multi-state cooperative banks amidst a crisis in PMC Bank affecting lakhs of depositors.

This is seen as government signal that the cover could be raised, partly to smoothen the passage of a modified Financial Resolution and Deposit Insurance (FRDI) Bill, shelved earlier because of depositors' concerns over the fallout of bank failures.