“Forward ever, backward never: onwards with Breaking Through”
How safe are your deposits if your bank fails? Read about the bail-in option
The Centre's proposed Financial Resolution and Deposit Insurance Bill (FRDI), which is aimed at plugging bankruptcies in the financial services sector, includes a special provision which by definition allows the affected banks to use depositors' money to absorb some of the losses. The provision, which finds its origins in the European banking crisis of 2008-09, has raised a red flag after which the Centre hinted at reviewing the proposal. The proposal is part of the FRDI, which has now been referred to the Parliamentary committee that plans to establish a resolution corporation to monitor financial firms, anticipate the risk of their failure, take corrective action, and work out a resolution plan.
How does it work?
In case of a bank failure, the proposed corporation will provide deposit insurance up to a certain limit, which has not been specified. Currently, bank deposits of up to Rs 1 lakh are insured but there are few banks that have failed in India in recent years as the Reserve Bank of India (RBI) has stepped in to work out a resolution plan without creating any risk for depositors.

The bill has suggested that the use of the ‘bail-in’ provision may result in cancellation of a liability, which could extend to bank deposits or could lead to modification of the terms or changing the form of the asset class. This provision would be last in the line for payments in case of liquidation.
The deposit insurance scheme currently covers all banks, commercial, regional, rural and cooperative banks. So far in 2017, more than Rs 28 crore was sanctioned from the insurance scheme to all co-operative banks according to information on the DICGC website.
“The present deposit insurance scheme will be subsumed by the new Bill, but the Rs 1 lakh deposit insurance amount will not change,’’ said Sandeep Parekh managing partner at Finsec Law Advisors. “To be precise, no commercial bank has been allowed to go down in India in the last 70 years and that implicit sovereign guarantee continues even with this new Bill. The bill proposes to establish a resolution corporation to monitor financial firms and oversee the liquidation, which was not the case in so far. The RBI which has been in charge of bank liquidations or resolutions will also no longer be in charge.
Once a financial services company, including a bank, slips into critical category, the resolution corporation will take over the firm and prepare a resolution plan during a year, which can be extended by another 12 months. The controversial provision of ‘bail in’ has been suggested, among various options, to resolve the stressed financial services companies. The other options include mergers, transfer of assets and liabilities to another entity, a bridge financial firm (where a new company is set up to take over the assets, liabilities and management as was the case with UTI), or liquidation via the National Company Law Tribunal.

The Parliamentary panel is expected to submit its report, which will be considered by the Union Cabinet before the Bill is tabled in Parliament again. But the plan has generated a lot of heat with bank unions as well as political parties criticising the move that has the potential to use deposits, beyond the insured amount, for reviving the bank

The government hinted at reworking the provision. “Drafting is still on. A lot of corrections will take place,” finance minister Arun Jaitley told reporters after the Cabinet briefing.
Source -Economic Times.