- Date : 23/07/2018
- Read: 3 mins
To calm the jittery investors down, the Union Government is expected to withdraw the FRDI Bill. How does it affect your investment decisions? Read more
The Financial Resolution and Deposit Insurance (FRDI) Bill, which was introduced in the Lok Sabha on August 11, 2017, made investors jittery owing to a ‘bail-in’ clause. To calm them down and to avoid unnecessary repercussions prior to the 2019 elections, the Union Government is expected to withdraw this Bill.
As per sources, the bill is expected to be withdrawn in the ongoing Parliament session, ending August 10, 2018.
What is the FRDI Bill all about?
When a financial institution is on a sinking ship, a bail-in comes into motion to rescue the institution. Due to this motion creditors and depositors bear a loss on their holdings.
While attempting to save banks from going bankrupt, this Bill potentially puts depositors’ savings accounts in jeopardy. Furthermore, a prospective plan B of sorts to raise security cover for bank deposits was in the making by authorities in the event that deposits were used to bail out banks that were nearly broke.
Presently, the Deposit Insurance and Credit Guarantee Corporation Act is providing protection for only up to Rs 1 lakh. Those with deposits over Rs 1 lakh have no protection and are considered similar to the claims of unsecured creditors.
The Bill envisioned the establishment of a resolution corporation to monitor financial firms, foresee any risk of failure, put corrective measures into place, and concoct a resolution plan. The Bill also stated that the resolution corporation would take over a firm and prepare a resolution for a year that can be extended by an additional 12 months if any bank/financial institution stumbled into the ‘critical category’.
The government’s stand
Time and again the government has reassured depositors about its commitment to protecting their (investor) interests. Unfortunately, a needless controversy has arisen. Finance Minister Arun Jaitley too emphasised the commitment of the government in guarding the interests of depositors.
Subhash Chandra Garg, Economic Affairs Secretary, said that public sector banks hold 70% of deposits, with the remainder in private banks.
Off late, the significant rise in non-performing assets (NPAs) and recurrent scams have left depositors on shaky grounds with banks. At such a time, the government's U-turn can come as a relief.
What it matters to investors?
As per a 2017 Securities and Exchange Board of India (SEBI) survey, in Indian households, more than 95% of them prefer parking their currency in bank deposits and the rest 10% of the people of less opt for investments in stocks or mutual funds.
With such statistics, anything that concerns a bank is a highly sensitive issue whether it pertains to safety deposits or interest rates. Indians, in general, are risk-averse and think multiple times and look for sound advice before investing in mutual funds or direct equities. There's still a majority who trust banks with their money.
Imagine what it would be like for a person who deposits their entire savings in the bank and to lose it all!