Why government's FRDI Bill will have huge implications for India like demonetisation and GST

Let's see the pros and cons of the proposed legislation.

After demonetisation and the Goods and Services Tax (GST), the Narendra Modi government is going to introduce yet another controversial measure: the Financial Resolution and Deposit Insurance (FRDI) Bill, 2017, purportedly to pave the way for a comprehensive resolution framework for specified financial sector entities.
The bill is supposed to deal with bankruptcy situation in banks, insurance companies and financial sector entities. This is the first time that a legislation of this sort has been proposed in India. Like the note-ban and GST, this measure too is going to impact the masses in a big way. Also, this policy too is as politically divisive as demonetisation and GST were.

Trinamool Congress leader Mamata Banerjee has already declared war against the proposed FRDI Bill which is set to be introduced in Parliament soon. Other Opposition parties, including the Congress, are also likely to join the anti-FRDI chorus. This would be yet another fiscal policy issue that will end up dividing the political class in a big way. But the question is: Should the government ignore the burgeoning opposition to this proposed legislation and use its majority in Parliament to go ahead with it? Let's see the pros and cons of the proposed legislation. Benefits The government claims the FRDI Bill aims to protect the depositors' money in state-run banks and there is no need to create any fear psychosis.
Finance minister Arun Jaitley harped on this point while replying to a discussion in the Lok Sabha on the Supplementary Demand for Grants - Second Batch for 2017-18, introduced in the house in August.

In his 2016-17 budget speech, Jaitley had said that a systemic vacuum exists with regards to bankruptcy situations in financial firms and that a comprehensive code on resolution of financial firms will be introduced as a bill in Parliament during 2016-17. The government believes that the bill seeks to protect customers of financial service providers in times of financial distress and also help encourage discipline among the financial service providers by putting a limit on the use of public money to bail out distressed entities. It also seeks to decrease the time and costs involved in resolving distressed financial entities.

a) A large number of retail depositors can benefit as the FRDI Bill seeks to decrease the time and costs involved in resolving distressed financial entities and help in maintaining financial stability in the economy by ensuring adequate preventive measures as well as provide necessary instruments in an event of crisis.

b) It will provide a comprehensive resolution framework for the economy and inculcate discipline among financial service providers in the event of financial crisis.

c) It promotes ease of doing business in the country, improves financial inclusion and increase access to credit, which may lead to the reduction of the cost for obtaining credit.

d) It would give increased access to finance enhancing enterprise growth, which in turn leads to preserving employment, growth and the creation of new job opportunities.

The problems Now here are the main points of objections to the legislation:

a) The bill's biggest red rag is its controversial provisions of a "bail-in" clause which suggests that depositors' money could be used by failing financial institutions to stay afloat.

b)The Resolution Corporation (rescue body), which is proposed under the bill, can use public money in case the bank starts to sink. The bill empowers the rescue body to decide the amount insured for each depositor. The rescue body can cancel even the Rs 1 lakh insurance that depositors get under the current law and a bank can even declare that they don't owe them any money at all.

c) People are worried that if this bill is passed in Parliament, the depositors' rights may go down the drain, but that is ONLY if the bank is going down the drain, and that is a rare scenario.

d) It seeks to place the entire financial structure of the country at the mercy of the government. The Resolution Corporation has been given powers that override those vested in the RBI, the Central Vigilance Commission (CVC) and even the Central Bureau of Investigation (CBI). Besides, the measures initiated by the corporation cannot be challenged in court, including the Supreme Court.

e) The legislation proposes to amend the SBI Act in order to insert a clause for its liquidation which gives rise to apprehensions that in due course the government might even take recourse to privatisation of the SBI.

So, what next?
Yes, the government of the day is well within its powers to bring in whatever legislations it deems fit. But eventually, all such measures have to have a nod from the biggest and the highest court: the people's court. The ultimate test of a government lies in the people's acceptance of its policies. The government must always be mindful of the age-old dictum: "State tax should be such which should not prove to be a burden on the subject; the King should behave like those bees which collect honey without causing harm to the tree." The proposed FRDI bill may be a fiscal policy and not a tax as such but the government must remember it should not cross the threshold of the general public's acceptance levels.