Reserve Bank of India (RBI) Governor Shaktikanta Das on Saturday batted for the setting up of a resolution corporation to tackle resolution and revival of stressed firms in the financial sector, an idea dropped by the government two years ago.
The Finance Ministry had, in 2018, withdrawn the Financial Resolution and Deposit Insurance (FRDI) Bill — which proposed a resolution corporation — over the controversial bail-in clause, which led to fears among depositors that the government may cancel or modify deposits in banks. Earlier this year, before the Covid-19 pandemic hit the country, the Finance Ministry was working on a proposal to set up a Resolution Authority — under a new law styled as Financial Sector Development and Regulation (FSDR) Bill — comprising the members from financial sector regulators as well as senior government officials as its members.
On Saturday, the RBI Governor said a resolution corporation is needed to deal with stress in the financial system. “We need a legislative backing to have some kind of a resolution corporation which has to deal with resolution and revival of stressed financial firms,” Das said at a banking conclave organized by the State Bank of India.
Proposal may gather momentum
With the RBI and the government on the same page, the proposal to set up a resolution corporation is likely to gather momentum in the coming months in order to avoid bank failures and emergence of stressed firms.
The proposal to set up the resolution corporation has gathered momentum after the financial sector witnessed a series of failures and emergence of stressed firms. The financial issues in firms like IL&FS, DHFL, PMC Bank and Yes Bank has led to the revival of the resolution corporation to ensure that failure of some financial institutions does not affect the entire system. While the RBI had earlier tackled bank failures by merging the failed bank with a strong bank, it went for a different model in the Yes Bank case by bringing in new investors led SBI and half a dozen other banks. “We need a structured mechanism with the legal backing to deal with stressed assets,” Das said.
The proposed Resolution Authority is likely to handle stressed banks, NBFCs, insurance companies, securities market players, co-operative banks and regional rural banks. This would require change in existing laws so that some of the powers of financial sector regulators are transferred to the resolution authority being proposed in the new regime.
The resolution corporation’s ambit will be restricted to orderly resolution and not to restoration and recovery. Each regulator will be tasked with creating a prompt corrective action framework for institutions under their ambit. The Resolution Fund, which will replace Deposit Insurance and Credit Guarantee Corporation, will collect premiums based on ‘risk-based assessment’. The FSDR has removed the controversial ‘bail-in’ provision.
As per Das, to strengthen the internal defenses, higher emphasis is now being given on causes of weaknesses than on symptoms. “The symptoms of weak banks are usually poor asset quality, lack of profitability, loss of capital, excessive leverage, excessive risk exposure, poor conduct and liquidity concerns,” he said.
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