Uninsured depositors likely to get preference over other creditors

A proposed Financial Resolution and Deposit Insurance Bill (FRDI), which is aimed at orderly resolution of bankruptcies in the financial services sector, includes a special high-risk deposit instrument, regulatory supervision by the finance ministry, and a bankruptcy framework that will envelope all financial institutions. Just like the current bank deposit insurance scheme, deposits up to Rs 1 lakh would be insured but there is also a proposal for a new kind of high-yielding deposits which can be called whenever they are deemed critical, which can be referred to as a bail-in clause. These instruments would be last in the line for payments in case of liquidation. “The bail-in provision relates to instruments specifically issued with a bail-in clause upfront with the specific understanding that these liabilities can be called up when the financial institutions are deemed critical,’’ said Usha Thorat, former deputy governor of the Reserve Bank of India. “This bill will also look to clarify some infirmities in the present scheme and provide uninsured depositors preference over other creditors. The resolution corporation will be under the finance ministry unlike the DICGC (Deposit Insurance and Credit Guarantee Corp) which is under the RBI.” A separate law to wind down institutions in the financial services is in the works in line with global developments where many countries have evolved special laws post the collapse of Lehman Brothers in 2008 which roiled the global financial system. While the Parliament has enacted a law for resolving other enterprises styled the Insolvency and Bankruptcy Code, the financial sector ones is still hanging fire.