Understanding the FRDI Bill 2017: Bail-in Clause, Deposit Insurance Reforms, and Public Concerns in India

The Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill), was introduced in the Lok Sabha on 10 August 2017. Its goal was to create a framework for addressing the failure of banks, insurance companies, and some systemically important financial institutions. At that time, Indian banks faced a serious crisis with non-performing assets (NPAs) exceeding ₹10 lakh crore. The government aimed to establish a modern resolution mechanism to maintain financial stability without repeatedly relying on taxpayers for bailouts funded by public money.

The bail-in provision triggered widespread concern because, unlike many countries where only certain liabilities or specific instruments (like Additional Tier-1 bonds) are subject to bail-in, the original version of the FRDI Bill seemed to grant the Resolution Corporation broad authority. There was no clear exclusion of insured deposits from bail-in, and no specific protection for ordinary savings account holders. This led many to fear that even individual depositors could lose part of their savings if a bank failed.

Another area of worry was the proposed change in deposit insurance coverage. Under the existing Deposit Insurance and Credit Guarantee Corporation Act, 1961, each depositor in an insured bank can receive a maximum of ₹1 lakh per bank in the event of liquidation or failure. This limit has not increased since 1993, despite inflation and the growth of household savings. The FRDI Bill aimed to replace the DICGC with a new Resolution Corporation and give it the power to determine the payout amount, potentially removing the guaranteed ₹1 lakh. Critics feared this could result in the government or corporation only returning a small percentage of deposits, or nothing at all in extreme cases.

The makeup of the proposed Resolution Corporation also drew attention. The Corporation was to have eleven members, six of whom (including the chairperson and three full-time members) would be appointed directly by the central government, along with representatives from the Finance Ministry, RBI, SEBI, and IRDA. While such representation is typical in regulatory bodies, many felt it would give the government too much influence over resolution decisions, especially bail-in decisions affecting millions of depositors.

It’s vital to consider the FRDI Bill in a global context. After the 2008 financial crisis, the Financial Stability Board (FSB) developed the Key Attributes of Effective Resolution Regimes for Financial Institutions under the G20 framework. One key attribute included bail-in powers to impose losses on shareholders and creditors instead of taxpayers. Countries such as the United States, through the Dodd-Frank Act’s Orderly Liquidation Authority, the European Union with its Bank Recovery and Resolution Directive, and smaller nations like Cyprus and Italy already had bail-in frameworks in place. As a G20 member, India committed to these global standards.

However, the Indian banking landscape is quite different from those of many developed countries. Public-sector banks dominate the market and have an implicit government guarantee. Retail depositors, particularly in rural and semi-urban areas, often view their bank deposits as completely safe, akin to government securities. The sudden possibility — however unlikely — that bank deposits could be used to support a failing bank was seen as a violation of that trust.

Public response was quick and fierce. By early 2018, online petitions against the bail-in clause had amassed over 150,000 signatures. Social media campaigns, videos from popular commentators, and newspaper editorials heightened fears that the government could “confiscate” savings to rescue banks that had irresponsibly lent to large corporate defaulters. Opposition political parties seized this moment to criticise the government, connecting the bill to demonetisation and alleging a pattern of undermining citizens’ financial freedom.

In reaction to the growing criticism, Finance Minister Arun Jaitley provided multiple clarifications in Parliament and through public statements from December 2017 to June 2018. He consistently claimed that the government was “fully committed” to safeguarding depositors’ interests and that the bail-in clause would apply only to unsecured creditors and not to regular depositors. The government also highlighted that Clause 55 of the Bill demanded that the Resolution Corporation consider the interests of depositors and adhere to the hierarchy of claims in the Companies Act and the Banking Regulation Act.

A Joint Parliamentary Committee (JPC), led by Shri Bhupender Yadav, was formed in 2017 to review the Bill clause by clause. The Committee held extensive discussions with the RBI, public-sector banks, private banks, depositor associations, legal experts, and international agencies. In its report, submitted on 20 March 2018, the JPC recommended several safeguards:

Despite these recommendations and the government’s willingness to include most of them, public anxiety lingered. By mid-2018, the political cost of advancing the Bill in its original form seemed too steep, especially ahead of the general elections scheduled for 2019. On 7 August 2018, the government formally withdrew the FRDI Bill from Parliament, stating that many of its goals could be achieved through amendments to existing laws like the RBI Act, the Banking Regulation Act, and the DICGC Act.

Even though the Bill was withdrawn, several of its central ideas have since been implemented gradually. The Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021, eventually increased the insurance limit to ₹5 lakh (effective from February 2020, but legislated later). The RBI has gained improved resolution powers under Section 45 of the Banking Regulation Act, which was notably used in the Yes Bank reconstruction in March 2020, where a bail-in was applied only to AT-1 bondholders, not depositors. The idea of a dedicated Resolution Corporation has been shelved for now, but discussions about an overall financial resolution framework continue.

The FRDI episode showcased the fragile balance between financial stability and depositor trust in a country where banking access has rapidly increased through initiatives like Pradhan Mantri Jan Dhan Yojana. While bail-in is accepted worldwide as a tool for addressing large, complex financial institutions, applying it in a retail-driven banking system with implicit government backing demands exceptional care and open communication.

As of 1 January 2019, Indian depositors remain protected by the ₹1 lakh DICGC coverage, and no bail-in of regular deposits has ever taken place. The withdrawal of the FRDI Bill highlighted that, in a democracy, public confidence in the security of bank deposits is not just a regulatory detail — it forms a fundamental social contract between citizens and the government.

This episode also emphasised the need for legislative drafting that accounts for public perception, particularly when adapting ideas from advanced economies to a different socio-economic context. While a strong resolution framework is essential — given the ongoing challenge of stressed assets and the expanding size of India’s financial sector — future efforts will need to include clearer safeguards, broader consultations, and step-by-step rather than sweeping changes.

Looking back, the FRDI Bill controversy was an important moment for public education about the complexities of modern banking regulation. It brought terms like “bail-in”, “resolution corporation”, and “systemic risk” into everyday discussions and reminded both policymakers and the public that reforms in the financial sector must always balance technical efficiency with maintaining public trust.