FRDI Bill, the new institutional framework for dealing with bankruptcies in banks would certainly make your blood boil. First, the depositors are treated like unsecured creditors. They stands at fifth position in the queue in the waterfall mechanism for distribution of whatever is left in the bank in case of a collapse.
Under the new Financial Resolution and Deposit Insurance Bill, 2017, the proceeds from sale of assets of a bank would first go to insured depositors. In the previous regime, the depositors were insured for only Rs 1 lakh irrespective of the deposit made in a bank. The new bill, however, makes no mention of the maximum amount of insured deposit. There is a possibility of government and the regulator, i.e., Reserve Bank of India, keeping the same limit or lower.
The second in the list is resolution costs, which is the cost incurred in the entire liquidation process right from legal cost at the National Company Law Tribunal (NCLT).
The third in the queue are workmen dues for 24 months. The secured creditors are also clubbed with workmen dues at the third position.
At the fourth position are the wages to employees for 12 month.
The amount to uninsured depositors is at the fifth spot. Surprisingly, it is the depositors money that is used in a banking system to do business. It's the core money that actually runs the banking system. These deposits, which will be mostly uninsured as the maximum insured deposit in the earlier bill was only Rs 1 lakh, are now under threat of not getting anything in a an insolvency.
The secured creditors are comfortably sitting at the third spot to recover whatever is left in a bank post liquidation.