🔴 Finance Ministry seeks RBI views on drafting fresh legislation
Even as the RBI has come out with a Prompt Corrective Action framework for NBFCs (non-banking financial companies), a need is being felt for a legislative backing for the entire financial sector. (Reuters/File)
The government has started discussions to put in place a resolution mechanism to deal with insolvency of firms in the financial sector. A modified version of the Financial Resolution and Deposit Insurance (FRDI) Bill — which was withdrawn in 2018 due to its controversial provision of bail-in that was perceived as undermining safety of depositors — is being contemplated. The Finance Ministry has recently sought views of the Reserve Bank of India (RBI) on drafting the fresh legislation and discussions are underway to putting in place a system to deal with financial firms’ insolvency while at the same time providing highest level of safety to depositors, sources familiar with the discussions said.
Even as the RBI has come out with a Prompt Corrective Action framework for NBFCs (non-banking financial companies), a need is being felt for a legislative backing for the entire financial sector. The RBI has recently superseded boards of Reliance Capital, SREI Infrastructure Finance and SREI Equipment Finance, and appointed additional director at the RBL Bank, raising concerns over solvency of firms across the financial sector.
The decision on PCA framework has come after four big finance firms — IL&FS, DHFL, SREI and Reliance Capital — which collected public funds through fixed deposits and non-convertible debentures collapsed in the last three years despite the tight monitoring in the financial sector. They collectively owe over Rs 1 lakh crore to investors. DHFL was resolved through the Insolvency and Bankruptcy Code, despite challenges in courts.https://images.indianexpress.com/2020/08/1×1.png
“DHFL resolution has set a kind of a template of resolution, which can be tried in other cases such as SREI. But there is a need to have a specific law to resolve insolvency of FIs (financial institutions). FIs should not be required to go through IBC given their impact on the financial system and systemic stability. These things can be resolved through the new law that is under discussion,” a senior government official said.Explained
Need for legislative backing
Even as the RBI has come out with a Prompt Corrective Action framework for NBFCs (Non Banking Financial Companies), a need is being felt for a legislative backing for the entire financial sector.
The FRDI Bill, 2017 was meant to address the issue of insolvency of firms in the financial sector — so that if a bank, NBFC, an insurance company, a pension fund or a mutual fund-run by an asset management company fails, a quick solution is available to either sell that firm, merge it with another firm, or close it down, with the least disruption to the system and other stakeholders.
The Bill was withdrawn due to concerns among public over safety of deposits despite assurances by the Central government. A key point of criticism was the so called bail-in clause in the Bill that said in case of insolvency in a bank, the depositors will have to bear a part of the cost of the resolution by a corresponding reduction in their claims. The government had then clarified that the bail-in clause would not be applied to public sector banks and it would be a tool of last resort, when a merger or acquisition is not viable, in the case of private sector banks.
A Financial Resolution Corporation was envisaged under the law as an agency that will classify firms according to the risks they pose, carry out inspections and, at a later stage, take over control. Since then, the government has tried to allay fears of depositors who would be given top priority in the event of liquidation of a financial firm. The deposit insurance cover has also been raised to Rs 5 lakh from Rs 1 lakh per account.
“With the deposit insurance cover being raised, over 50 per cent of the total assessable bank deposits are now insured and this percentage is even higher at around 60 per cent for the public sector banks. Attempts have been made to provide maximum safety to depositors, and the discussions on the financial resolution legislation should be seen in that light itself,” a government official said.