Orderly failure options will help Indian financial firms flourish

This bill was earlier introduced in 2016 and withdrawn in 2018 primarily due to its controversial provision of a ‘bail-in’. This offered a distressed financial service provider the option to restructure its debt internally by either writing off its uninsured debt or converting deposits to other instruments such as equity. This was perceived as antithetical to the public interest, as it was alleged to put depositors’ money at huge risk. In reality, however, that bail-in clause was in the interest of depositors and also in sync with global standards. There are, however, other concerns with the framework that was proposed earlier.

The first one is of ambiguity over its scope. It has been unclear whether FRDI provisions would be applicable to pension funds and housing finance companies (HFCs), as they were not explicitly mentioned in the FRDI bill. This could have led to litigation in the future.

Further, global templates should be taken into account. The Key Attributes set by the Financial Stability Board (FSB), an international body that monitors and makes recommendations for the global…