The government on Tuesday has withdrawn Finance Resolution and Deposit Insurance Bill (FRDI) of 2017 from the Lok Sabha.

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Bill to be withdrawn in #LokSabha: Financial Resolution and Deposit Insurance Bill, 2017.

— PRS Legislative (@PRSLegislative) August 7, 2018

The bill had been tabled in the Parliament last year in August with the aim of resolving the rising non-performing assets issue in the banking system.

In October 2017, the Reserve Bank of India (RBI) released a list of 12 bad loan accounts of major companies and directed the firms to either come up with a resolution plan or go ahead with the insolvency proceedings.

Since then, the depth of the stressed asset problem has been noticed.

According to the latest data available, the bad loan pile has crossed Rs 10 lakh crore as of June 2018.

What is the FRDI Bill?

The bill has given the right to resolve the stressed assets of a company to a Resolution Corporation (RC).

The RC, along with monitoring the financial health of the company, will be allowed to enforce bail-in methods or a combination of this with other methods.

The methods which can be undertaken include merger or acquisition, transferring the assets, liabilities and management to a temporary firm and liquidation. If the resolution is not completed within two years, the firm will be liquidated.

The RC or the regulator will be required to classify the financial firms under five categories, based on their risk of failure. The categories in the order of increasing risk are: (i) low, (ii) moderate, (iii) material, (iv) imminent, and (v) critical.

The RC has been directed to take over the management of the 'critical' financial company and is expected to resolve the bad debt within a year.

Why is the bill likely to be withdrawn?

The bill, however, had caused a lot of controversies, especially regarding Section 52 of the bill - the bail-in policy.

The section mentions that a depositor’s money, among other things, can also be used in the resolution mechanism for the banks.

The bill has not specified the deposit insurance, the amount the depositor will get back at the time of bank failure, of which the rest will be forfeited.

As of now, the Deposit Insurance and Credit Guarantee Corporation had set an amount of Rs 1 lakh in 1993.

This particular norm of the bill, Section 52, had raised concerns in the last Monsoon Session, because of which the enforcement of the bill had been deferred.

This is different from a bail-out policy, which is when the government or public funds inject capital into an ailing company.

A bail-out can be done either by cancelling out the bank’s liabilities or converting them into other forms, such as equity.

This has been the traditional method which India has been following to relieve companies and/or financial companies off their bad debts.

Along with this difficulty, the other methods of resolving bad assets, the establishment of the resolution corporation and the pre-conditions before using the depositor's money were required to be appropriated.

First Published:Aug 7, 2018 12:26 PM IST