The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill) was introduced in the Lok Sabha on 10 August 2017 with the stated objective of establishing an effective framework to deal with the failure of banks, insurance companies, and certain categories of systemically important financial institutions. At a time when Indian banks were grappling with a mounting non-performing assets (NPAs) crisis that had crossed ₹10 lakh crore, the government sought a modern resolution mechanism that could protect financial stability without repeatedly burdening taxpayers through bail-outs financed by public money.
One of the most discussed and controversial provisions of the original Bill was Clause 52, which empowered a proposed Resolution Corporation to undertake a “bail-in”. In simple terms, a bail-in is the opposite of a bail-out. While a bail-out uses external funds (usually taxpayer money) to rescue a failing bank, a bail-in uses the bank’s own internal resources — including unsecured debt and, potentially, certain categories of deposits — to absorb losses and recapitalize the institution. The intention was to make creditors and large depositors share the pain of failure rather than shifting the entire burden to the state.
The bail-in provision immediately raised alarm because, unlike many international jurisdictions where only liabilities above a certain threshold or specific instruments (such as Additional Tier-1 bonds) are bailable-in, the original drafting of the FRDI Bill appeared to give the Resolution Corporation wide discretion. There was no explicit exclusion of insured deposits from the scope of bail-in, nor was there a clear hierarchy that protected ordinary savings account holders. This led to widespread apprehension that even retail depositors could lose a portion of their savings if a bank failed.
Another point of concern was the proposed change in deposit insurance coverage. Under the existing Deposit Insurance and Credit Guarantee Corporation Act, 1961, every depositor in an insured bank is entitled to a maximum of ₹1 lakh per bank in case of liquidation or failure. This limit had remained unchanged since 1993 despite inflation and growth in household savings. The FRDI Bill sought to replace the DICGC with a new Resolution Corporation and empower it to determine the quantum of payout, potentially removing the statutory guarantee of ₹1 lakh. Critics feared this could lead to a situation where the government or the Corporation could decide to return only a fraction of deposits, or nothing at all in extreme circumstances.
The composition of the proposed Resolution Corporation also attracted scrutiny. The Corporation was to have eleven members, of whom six (including the chairperson and three full-time members) were to be appointed directly by the central government, with additional representation from the Finance Ministry, RBI, SEBI, and IRDA. While such representation is common in regulatory bodies, many saw it as giving the government disproportionate influence over resolution decisions, especially bail-in decisions that could directly affect millions of depositors.
It is important to place the FRDI Bill in its global context. After the 2008 financial crisis, the Financial Stability Board (FSB), under G20 auspices, developed the Key Attributes of Effective Resolution Regimes for Financial Institutions. One of the key attributes was the introduction of bail-in powers so that losses could be imposed on shareholders and creditors rather than taxpayers. Countries such as the United States (through the Dodd-Frank Act’s Orderly Liquidation Authority), the European Union (Bank Recovery and Resolution Directive), the United Kingdom, and even smaller economies like Cyprus (2013) and Italy (2015-16) had already introduced bail-in frameworks. India, as a G20 member, had committed to adopting these standards.
However, the Indian banking landscape differs significantly from many developed economies. Public-sector banks dominate the market and enjoy an implicit sovereign guarantee. Retail depositors, especially in rural and semi-urban areas, often perceive their bank deposits as completely safe, comparable to government securities. The sudden introduction of the possibility — however remote — that deposits could be used to rescue a failing bank was seen as a breach of that trust.
Public reaction was swift and intense. By early 2018, online petitions against the bail-in clause had gathered over 150,000 signatures. Social media campaigns, videos by popular commentators, and newspaper editorials amplified fears that the government could “confiscate” savings to rescue banks that had lent imprudently to large corporate defaulters. Opposition political parties seized the opportunity to criticise the government, linking the Bill to demonetisation and alleging a pattern of undermining citizens’ financial autonomy.
In response to the mounting criticism, Finance Minister Arun Jaitley issued multiple clarifications in Parliament and through public statements between December 2017 and June 2018. He repeatedly asserted that the government was “fully committed” to protecting depositors’ interests and that the bail-in clause would only apply to unsecured creditors and not ordinary depositors. The government also pointed out that Clause 55 of the Bill explicitly required the Resolution Corporation to have “due regard to the interests of depositors” and the hierarchy of claims under the Companies Act and the Banking Regulation Act.
A Joint Parliamentary Committee (JPC) under the chairmanship of Shri Bhupender Yadav was constituted in 2017 to examine the Bill clause-by-clause. The Committee held extensive consultations with the RBI, public-sector banks, private banks, depositor associations, legal experts, and international bodies. In its report submitted on 20 March 2018, the JPC recommended several safeguards:
- Explicit exclusion of insured deposits from the scope of bail-in.
- Continuation of deposit insurance coverage of at least ₹1 lakh, with a recommendation to periodically review and increase the limit.
- Clear hierarchy of claims that would protect depositors ahead of other unsecured creditors.
- Greater independence for the Resolution Corporation.
Despite these recommendations and the government’s willingness to incorporate most of them, public unease persisted. By mid-2018, the political cost of pushing the Bill in its original form appeared too high, especially with general elections scheduled for 2019. On 7 August 2018, the government formally withdrew the FRDI Bill from Parliament, stating that many of its objectives could be achieved through amendments to existing laws such as the RBI Act, the Banking Regulation Act, and the DICGC Act.
Even though the Bill was withdrawn, several of its core ideas have since been implemented in a piecemeal fashion. The Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021 eventually raised the insurance limit to ₹5 lakh (effective from February 2020, but legislated later). The RBI has been granted enhanced resolution powers under Section 45 of the Banking Regulation Act (used notably in the Yes Bank reconstruction in March 2020, where a bail-in was applied only to AT-1 bondholders, not depositors). The concept of a dedicated Resolution Corporation has been shelved for the present, but the debate on a comprehensive financial resolution framework continues.
The FRDI episode highlighted the delicate balance between financial stability and depositor confidence in a country where banking penetration has expanded dramatically through initiatives such as Pradhan Mantri Jan Dhan Yojana. While bail-in remains an internationally accepted tool for resolving large and complex financial institutions, its application in a predominantly retail-funded banking system with implicit government guarantees requires extraordinary caution and transparent communication.
As of 1 January 2019, Indian depositors continue to enjoy the protection of the ₹1 lakh DICGC cover, and no bail-in of ordinary deposits has ever been carried out. The withdrawal of the FRDI Bill demonstrated that in a democracy, public trust in the safety of bank deposits is not merely a technical regulatory issue — it is a fundamental social contract between citizens and the state.
The episode also underscored the importance of legislative drafting that is sensitive to public perception, especially when introducing concepts borrowed from advanced economies into a very different socio-economic context. While the need for a robust resolution framework remains — given the continuing challenge of stressed assets and the growing size of India’s financial sector — future attempts will need to be accompanied by clearer safeguards, wider consultation, and incremental rather than sweeping reform.
In retrospect, the FRDI Bill controversy served as an important public education moment about the complexities of modern banking regulation. It brought terms such as “bail-in”, “resolution corporation”, and “systemic risk” into everyday conversation and reminded both policymakers and citizens that financial sector reforms must always weigh technical efficiency against the preservation of hard-earned public trust.
(Updated)
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