Union Cabinet approves bill to deal with bankruptcy at banks, insurance firms
New Delhi: The Union cabinet has approved a proposal to introduce a bill to deal with bankruptcy of banks, insurers and other financial services firms, seeking to shield the financial system from systemic crises and protect consumers.
The move is in line with an announcement in finance minister Arun Jaitley’s 2016-17 budget speech that the government intends to put in place a comprehensive resolution framework to tackle any potential crises in financial companies.
When enacted, the Financial Resolution and Deposit Insurance Bill, 2017, will lead to the setting up of a Resolution Corporation that will protect the stability and resilience of the financial system; provide deposit insurance to consumers of some categories of financial services up to a reasonable limit; monitor systemically important financial institutions (SIFI); and protect public funds to the extent possible.
“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,” a government statement said.
The corporation covers up to Rs1 lakh worth of deposits by individuals in Indian banks. The proposed Resolution Corporation will help households deal with potential crises at other financial services providers like insurance firms and asset management companies as well.
Insurance firms in India are highly capitalised and unlikely to face bankruptcy, but the new body may need to monitor banks and other financial institutions on a regular basis, said Joydeep K Roy, partner at PwC India.
“Since the new act will also repeal and replace the existing Deposit Insurance and Credit Guarantee Corporation Act, 1961 which currently insures bank deposits up to Rs1 lakh only, the new body can set differential insurance rules for a varied set of deposits,” he added.
Experts said the ministry of finance had borrowed the concept of Resolution Corporation from the Financial Sector Legislative Reform Commission (FSLRC).
“FSLRC designed a single consistent framework for the full financial system. One component in this was the Resolution Corporation, which deals with the failure of most financial firms,” said Ajay Shah, a professor at the National Institute of Public Finance and Policy (NIPFP).
In May 2016, Parliament enacted the Insolvency and Bankruptcy Code, 2016 for non-financial entities. The proposed Bill complements the Code by providing a resolution framework for the financial sector.
“Putting these two pieces together, we have an institutional machinery for dealing with the failure of all firms,” Shah said.
Jaitley, in his last year’s budget speech, said a systemic vacuum exists in tackling bankruptcy situations in financial firms.
“This code will provide a specialized resolution mechanism to deal with bankruptcy situations in banks, insurance firms and financial sector entities,” he said.
On 15 March last year, the ministry set up a panel under additional secretary Ajay Tyagi, now the head of the stock market regulator, to draft and submit the bill. The finance ministry released the draft bill in September last year.
“Once implemented, this Bill together with the Code will provide a comprehensive resolution framework for the economy,” Wednesday’s government statement said.
The bill seeks to give comfort to consumers of financial service providers in financial distress.
“It also aims to inculcate discipline among financial service providers in the event of financial crises by limiting the use of public money to bail out distressed entities,” the statement said.