Beating the Rhetoric
The Financial and Deposit Insurance Bill was introduced in 2017 during the Monsoon session of Parliament. The Bill is a remarakable departure from all other bills introduced and in structure and spirit is similar to the Insolvency and Bankruptcy Code which was introduced in 2016. The bill seeks to lay down a comprehensive framework to deal with financial institutions such as banks and insurance companies should they face financial closure. In spirit the bill seeks to protect the rights of its citizens should the organisation that they have invested in, fails to take off. In an increasingly volatile global financial environment this is an important step towards protecting the rights of the citizens.
The Bill seeks to provide for the resolution of certain categories of financial service providers in distress; the deposit insurance to consumers of certain categories of financial services; designation of systemically important financial institutions; and establishment of a Resolution Corporation for protection of consumers of specified service providers and of public funds for ensuring the stability and resilience of the financial system and for matters connected therewith or incidental thereto.
The financial firms that have been described in the Bill include banks, insurance companies, and stock exchanges, among others. These financial firms accept deposits from consumers, channel these deposits into investments, provide loans, and manage payment systems that facilitate transactions in the country. These entities interact with each other and propel the financial and the economic ecosystem of the country. Yet at this juncture the regulation for closing down these entities should they fail are scattered across a broad spectrum. While in the case of banks the power lies with the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (IRDA) looks at the insurance companies while the Securities and Exchange Board of India (SEBI) is responsible for stock exchanges. The presnet bill seeks to change the same.
Since 2008 the economic structure of the world’s major superpowers has seen much shift. The failure of Lehmann Brothers and other big financial entities have brought to focus the protection of the rights of the customers should such organisations fail.This bill seeks to change that by protecting the rights of the individual customer to these financial institutions. A major step towards this is the creation of a Resolution Corporation.The Bill seeks to create a consolidated framework for the resolution of financial firms by creating a Resolution Corporation. The Resolution Corporation will include representatives from all financial sector regulators and the ministry of finance, among others. The Corporation will monitor these firms to pre-empt failure, and resolve or liquidate them in case of such failure.
The Resolution Corporation or the regulators (such as the RBI for banks, IRDA for insurance companies or SEBI for the stock exchanges) will classify financial firms under five categories, based on their risk of failure .This classification will be based on adequacy of capital, assets and liabilities, and capability of management, among other criteria. The Bill proposes to allow both, the regulator and the Corporation, to monitor and classify firms based on their risk to failure.
Based on the risk to failure, the Resolution Corporation or regulators may direct the firms to take certain corrective action. For example, if the firm is at a higher risk to failure (under ‘material’ or ‘imminent’ categories), the Resolution Corporation or the regulator may: prevent it from accepting deposits from consumers or prohibit the firm from acquiring other businesses, or may require it to increase its capital. Further, these firms will formulate resolution and restoration plans to prepare a strategy for improving their financial position and resolving the firm in case it fails.
The Resolution Corporation will take over the administration of a financial firm from the date the firm is classified as ‘critical’ which means it is on the verge of its failure. The Resolution Corporation will resolve the firm using any of the methods specified in the Bill, within one year. This time limit may be extended by another year. During this period, the firm will be immune against all legal actions. The maximum time limit that will be available for these actions will be to the extent of two years.
The Resolution Corporation can resolve a financial firm using any of the following methods: transferring the assets and liabilities of the firm to another firm, merger or acquisition of the firm, creating a bridge financial firm (where a new company is created to take over the assets, liabilities and management of the failing firm), bail-in (internally transferring or converting the debt of the firm), or liquidate the firm to repay its creditors.
If the Resolution Corporation fails to resolve the firm within a maximum period of two years, the firm will automatically go in for liquidation. The Bill specifies the order of priority in which creditors will be repaid in case of liquidation, with the amount paid to depositors as deposit insurance getting preference over other creditors.
While the Bill specifies that resolution will commence upon classification as ‘critical’, the point at which this process will end may not be evident in certain cases. For example, in case of transfer, merger or liquidation, the end of the process may be inferred from when the operations are transferred or liquidation is completed, but for some other methods such as bail-in, the point at which the resolution process will be completed may be unclear.
This Bill will indeed strengthen the hand of the consumer or the customer during these uncertain financial times. It will also increase global investors confidence in the Indian eocnomic system. In the present time when the Indian economy is facing certain challenges this Bill is undoubtedly a step in the right direction. (Views expressed by the author are personal)