Mumbai: The central bank is working on setting up a financial sector resolution corporation, said N.S. Vishwanathan, deputy governor, Reserve Bank of India (RBI).
“We have discussed with the government the shape this corporation will take. Its purpose is to not only provide insurance to financial companies but also to provide resolution," Vishwanathan said at the Mint Annual Banking Conclave.
The deputy governor said that while non-financial sector companies had the Insolvency and Bankruptcy Code (IBC) to deal with resolution, the proposed corporation is likely to help protect financial sector companies.
In September 2016, a panel set up by the government had released a draft law on financial sector resolution.
This draft had suggested setting up a corporation to manage resolution. And it had also said that once the Financial Resolution and Deposit Insurance Bill, 2016 was enacted, the Deposit Insurance and Credit Guarantee Corporation (DICGC) could be dissolved and all its functions passed on to the new corporation.
Vishwanathan pointed out that the regulator had already put in place measures to de-risk bank balance sheets by reducing excessive exposure to large corporate accounts.
“We are also using this to develop the capital market. Banks will have to find different ways of using their funds," he said.
In December 2016, RBI said that it would cap banks’ exposure to a group of connected companies at 25% of the lenders’ core capital, seeking to reduce concentration risk in a banking industry laden with bad loans.
The central bank lowered the limit from 40% of the banks’ total capital funds, which include both Tier 1 (core) and Tier 2 capital, and gave banks until 2019 to meet the new norms.
In the case of an individual company, this limit would be changed to 20% of Tier 1 capital, compared with 15% of total capital funds currently, RBI had said.
The deputy governor said that while stressed loans were something that the banking sector was grappling with, the setting up of the Central Repository for Information on Large Credit (CRILC) was helping them gather more information and take better calls while resolving stress.
RBI is also looking at the financial technology space and assessing the impact that it could have on various kinds of financial services.
“We need to make exploratory efforts on what needs to be regulated, how it will be regulated in a way that innovation is not undermined," Vishwanathan said.
“We have a multi-regulatory working group that we have put in place to look at the entire gamut of issues that are affecting the industry and hopefully will get their report soon," he added.