12 Jan 2018 13:09 IST

Regulators fret over role overlap in FRDI Bill

Banks too voice concern before a parliamentary committee vetting the proposed legislation

The proposed Financial Resolution and Deposit Insurance (FRDI) Bill is set to be the next big political faultline, with all the main stakeholders — regulators, banks, stock exchanges, insurance companies and depositories — voicing serious objections to various clauses of the Bill.

The stakeholders have outlined these objections before a joint parliamentary committee (JPC) and the issues raised have led to a heated debate within the panel. The ruling NDA coalition has a clear majority in the 30-member JPC, which is headed by BJP MP Bhupendra Yadav.

BusinessLine has reliably learnt that the key objections pertain to regulatory overlap/areas of conflict between the proposed Resolution Corporation (RC), the sector regulators and the Centre; issues related to deposit insurance; bail-in and bail-out provisions; matters relating to cooperative banks and the criteria for classification of a specific service provider into low/moderate/material/imminent and critical risk to viability.

Kill bill: Opposition

The Opposition is clear that given the nature and seriousness of objections, the Bill should be killed. An Opposition MP told BusinessLine that they will urge the panel to recommend that the Centre reject the Bill. “Almost all institutions that will be party to this Bill have opposed it. We (the Opposition) will recommend that the Bill be rejected. These institutions deserve appreciation for speaking their minds,” the member said.

However, the ruling coalition is not ceding ground. An MP who supports the Bill said the Department of Economic Affairs has countered every objection raised by the regulators. He blamed certain “Left-wing trade unions” for “spreading lies” about the Bill.

“The Centre has answered all the queries put by us and the regulators. The FRDI Bill is necessary as our regulatory mechanism needs to be strengthened. We are sure the panel will submit a unanimous report after hearing every stakeholder,” the member said.

Specific objections

But the fine-print has several red flags. A closer examination of the nature of the objections reveals that it is not just the unions, but every major stakeholder, including the RBI, that has objected to specific clauses of the Bill. For instance, the RBI has questioned the possible overlap and clubbing together of functions if a Resolution Corporation is formed.

The dual regulatory structure may even have an impact on ‘ease of doing business’, ICICI Bank has warned. Banks have also expressed reservation on the Bill omitting the mention of deposits till ₹1 lakh being insured. On the bail-in provision, they have demanded clarity.

The RBI has sought amendments to clause 36(5) of the Bill, which equips the RC with powers to specify the criteria of classification of risk of a particular service provider. Currently, the sector regulator decides on such matters.

The RBI said the ‘risk to viability’ should be determined by the appropriate regulator, in consultation with the RC, and said the classification of risk up to the ‘imminent’ stage should be left to the regulator. The Indian Banks’ Association has backed this proposal of the RBI.

Simultaneously, the Union Bank of India has termed the powers vested with the RC as “draconian” and said that it should be subject to the overarching power of the Centre, otherwise confidence in the financial system will crumble. It also said that Chapter 6 of the FRDI Bill creates an unwarranted conflict zone between the regulator and the RC.

'Limit RC role'

Regulators, according to Union Bank of India, are better suited to job risk categorisation and the RC’s role should be confined to resolution and liquidation.

The Insurance Regulatory and Development Authority of India (IRDAI) has questioned Clause 14(1) that gives the RC the power of investigation.

On deposit insurance, the Centre is learnt to have told the panel that Clause 29(1) of the Bill gives scope for enhancement of the deposit insurance level of a depositor. The RBI suggested that a new provision should be added to the FRDI Bill to ensure that the ₹1 lakh limit continues.

The RBI also pointed out that there is no clarity on the duration for which a service provider will be required to pay a resolution fee.

The RBI is learnt to have sought a clarification on ‘eligible cooperative banks’ under the FRDI’s ambit. It has also suggested that such banks may not be contributing to the resolution fund, and so the ‘corporation insurance fund’ could be used under the resolution scheme, as is currently being done under the Deposit and Credit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961.

Hot issue

The nature of objections before the parliamentary panel suggests that the ruling coalition may not be able to force the Bill’s passage through its brute majority in the Lok Sabha.

Already, street agitations have begun on the issue, with the principal opposition party, the Congress, staging a demonstration before the RBI office in Kolkata last month.