FRDI Bill 2017 and the Resolution of Failing Banks in India

Company insolvency law asks what to do after a firm fails. For banks that question arrives too late: a bank fails at the speed of a rumour, its creditors are depositors who cannot assess it, and its failure can take the payment system down with it. The world's answer after 2008 was a special resolution regime for financial firms. India drafted one, the Financial Resolution and Deposit Insurance Bill of 2017, and then withdrew it in a storm over two words, bail in. What remains is a working but improvised machinery of moratorium, forced marriage and a borrowed insolvency code, and a gap every committee since has pointed at.

1. Why ordinary insolvency law cannot resolve a bank

• Speed: insolvency proceedings take months under moratorium; a bank run finishes in days, and the moratorium itself, freezing deposits, is the harm the law should prevent.
• Creditor democracy fails: the Code hands the firm to a committee of creditors, but a bank's creditors are mostly depositors, dispersed, uninformed and protected by insurance, in no position to run a resolution.
• Contagion: one bank's liabilities are other banks' assets and the public's money; failure is systemic in a way a factory's is not, so the test is financial stability, not creditor recovery.
• The international standard is the Financial Stability Board's Key Attributes of Effective Resolution Regimes (2011): a dedicated resolution authority, powers of early intervention, transfer, bridge institution, bail in and temporary stay, exercisable over a weekend, with no creditor worse off than in liquidation. India, a G20 member, has endorsed the standard; its statute book has yet to enact it.

Figure 1: The resolution toolkit the standard expects

2. The FRDI Bill, 2017

• Introduced in the Lok Sabha in August 2017, built on the FSLRC's resolution chapter: a Resolution Corporation replacing the deposit insurance corporation, covering banks, insurers and systemically important financial firms.
• Firms would be classified by risk to viability, from low through moderate, material and imminent to critical; at critical the Corporation would take over and resolve within a time limit by transfer, bridge service provider, merger, bail in or liquidation.
• Bail in was one tool among several: the power to cancel or convert specified liabilities so that the firm's own creditors, not the exchequer, absorb the loss, with insured deposits expressly protected and a no-creditor-worse-off floor.
• The Bill went to a joint parliamentary committee, met a public campaign built on the fear that savings deposits could be bailed in, and was withdrawn in August 2018, the Government citing the need to re-examine deposit protection and bail in.

Figure 2: The choice the Bill forced into the open

3. What India actually does: the rescues

Without a resolution statute, failure is handled with the tools the Banking Regulation Act has always had: moratorium and compulsory amalgamation under section 45, supervisory directions under section 35A, and reconstruction schemes, each deployed ad hoc and each time slightly differently.

Figure 3: Four failures, four different answers

• Yes Bank (March 2020): moratorium capping withdrawals, then a Government reconstruction scheme under which a consortium led by State Bank of India recapitalised the bank; the additional tier one bonds were written off, a write-off the bondholders challenged in the courts and the clearest Indian instance of investors bearing loss without a statutory hierarchy.
• Lakshmi Vilas Bank (November 2020): moratorium and, within the month, compulsory amalgamation into DBS Bank India under section 45, with equity and tier two bonds extinguished, the speed showing what section 45 can do, and the extinguishment showing who pays when there is no statutory creditor hierarchy for rescue.
• PMC Bank (2019 to 2022): fraud discovered, directions freezing withdrawals for over two years, and eventual takeover by Unity Small Finance Bank in 2022 with large deposits repaid in instalments over several years, the depositors' wait itself the argument for a regime that resolves in days.
• DHFL and the insolvency route: for non-bank lenders the Government notified the Financial Service Providers Rules in November 2019 under section 227 of the Insolvency Code: the regulator initiates, an administrator replaces the board, and the corporate process runs with modifications. DHFL went in first (November 2019) and was sold to Piramal in 2021; Srei's twin companies followed in 2021, and Reliance Capital after them. The route works, but only for non-banks, only at the regulator's instance, and at corporate insolvency speed.

4. The gap, stated precisely

• No resolution authority: the Reserve Bank supervises and the deposit insurer pays, but no agency owns the job of resolving a failing bank against the clock.
• No creditor hierarchy for rescue: who absorbs loss in a section 45 amalgamation is decided scheme by scheme, which is why each writedown lands in court.
• No cross-sector coverage: banks have section 45, non-banks the borrowed Code, cooperative banks years of directions; an insurer or market infrastructure has nothing comparable.
• Discretion in place of order: each rescue is a negotiation, and the implicit public backstop prices every large bank's debt. Committees from the FSLRC through the Financial Sector Assessment Programme reviews have repeated the same recommendation: enact a resolution regime; as of 2026 none has been enacted.

5. Quick Revision

1. Resolution is pre-insolvency intervention; liquidation is the last tool, not the regime.
2. Bail in replaces the taxpayer with the investor, and was the Bill's undoing.
3. Section 45 is India's working resolution tool, powerful but standardless.
4. The Code reaches non-bank financial firms only through the 2019 rules.
5. Every rescue since 2018 is evidence on both sides of the FRDI debate.

6. Frequently Asked Questions

Could savings deposits really have been bailed in under the FRDI Bill?

The Bill's text protected insured deposits absolutely and required that no creditor, depositors included, receive less than in liquidation. Above the insured limit, a deposit is in law an unsecured claim, and the Bill was honest about what that means in a failure, which existing law also implies but never states. The political failure was of sequence: the assurance rested on an insurance limit of ₹1 lakh that had not moved in a quarter century, so households correctly read themselves as largely uninsured. Raising the cover first and legislating bail in second might have survived; the reverse order did not.

If section 45 rescues work, why does the gap matter?

Because what section 45 delivers is an outcome, not an order. It can compel an amalgamation at speed, as Lakshmi Vilas showed, but it says nothing about who absorbs loss first, so every scheme invents its own hierarchy and buys years of litigation from the bondholders it surprises. It requires a willing or compellable acquirer, which exists for a mid-sized bank and may not for a very large one. It covers banks alone. And its availability depends on the exchequer's and the system's capacity at the moment of failure, which is exactly the discretion the Key Attributes are designed to replace with rules announced in advance, priced by markets in advance, and executable over a weekend.

Why not simply extend the Insolvency Code to banks?

The 2019 rules show both the possibility and the limit. The Code's machinery, moratorium, committee of creditors, resolution plan, presumes creditors who can wait and deliberate. A non-bank lender like DHFL, funded by banks and bondholders, fits: its creditors are institutions, and eighteen months of process costs money but not panic. A deposit-taking bank does not fit: the moratorium that protects the estate is a freeze on the public's transaction balances, the creditors who would vote are the depositors being protected, and the externality is the payment system, which no creditor votes for. Hence the universal design: a special regime for banks, with the insolvency code as its backstop for liquidation, not its substitute.

7. Related Topics and Provisions

• Moratorium, reconstruction and amalgamation of banking companies
• Deposit insurance and the DICGC
• Capital adequacy and the Basel framework in Indian banking
• The FSLRC and the Indian Financial Code
• The Insolvency and Bankruptcy Code and the banker
• Urban cooperative banks and their regulation