To protect the stability and resilience of the financial system, protect public funds and obligations of consumers up to a reasonable limit, the Union Cabinet approved a proposal Wednesday to introduce the Financial Resolution and Deposit Insurance Bill, 2017 that will pave the way to set up a Resolution Corporation to deal with bankruptcy in banks, insurance companies and financial entities. The proposed law can benefit a large number of retail depositors because the Bill not only aims to strengthen and streamline the current framework of deposit insurance, but also seeks to decrease the time and costs involved in resolving distressed financial entities.
While the Bill seeks to give comfort to consumers of financial service providers during financial distress, it also aims to instill discipline among financial service providers in the event of a financial crisis by limiting the use of public money to bail out distressed entities. This will help in maintaining financial stability in the economy by ensuring adequate preventive measures, and at the same time provide necessary instruments to deal with an event of crisis.
The decision to approve the Financial Resolution and Deposit Insurance Bill, 2017, comes a year after the government enacted the Insolvency and Bankruptcy Code, 2016, for the resolution of insolvency in non-financial entities. In a statement issued Wednesday, the government said, “The proposed Bill complements the Code by providing a resolution framework for the financial sector. Once implemented, this Bill together with the Code will provide a comprehensive resolution framework for the economy.”
The Bill will also lead to repeal or amendment of resolution-related provisions in sectoral Acts as listed in Schedules of the Bill. “It will also result in the repealing of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, to transfer the deposit insurance powers and responsibilities to the Resolution Corporation,” the official statement said.
Financial services industry experts say that it will benefit small depositors. “It is good for a certain segment which is likely to lose their savings or deposits. While we are still awaiting for the amount of deposits that will be insured, some estimates suggest that it could be around Rs 1 lakh or slightly higher than that,” said Ashvin Parekh of Ashvin Parekh Advisory Services.
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