Monitoring financial firms(Hindu summary-13th July 2018)

www.iasinsights.in ; www.iasgyaan.com posts Hindu  summary about The Financial Resolution and Deposit Insurance Bill, 2017

Monitoring financial firms

The Hindu

Context:

About The Financial Resolution and Deposit Insurance Bill, 2017

Purpose:

  • It enables the specified financial sector entities and service providers to deal with bankruptcy in banks, insurance companies and financial sector entities.
  • The recently enacted Insolvency and Bankruptcy Code, 2016 to deal with the insolvency resolution issues of non-financial entities will be complemented by the proposed Bill.

Provisions of the bill:

  • It seeks to give comfort to the consumers of financial service providers in financial distress.
  • Its objectives include the maintenance of financial stability during a crisis.
  • Proposes the setting up of a Resolution Corporation by the Central government. It would lead to repeal or amendment of resolution-related provisions in legislation, including the repeal of the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
  • Section 13:The powers and functions of the Corporation to include providing deposit insurance to banking institutions, specifying the criteria for classification of a specified service provider into one of the categories of risk to viability, acting as an administrator for a specified service provider under critical risk, exercising powers in relation to certain termination rights in respect of specified service providers, resolving a specified service provider under critical risk, and acting as a liquidator for a specified service provider.

Entities or service providers covered under FRDI Bill,2017

  • 2nd schedule of the Bill lists 11 categories of institutions which would come under the definition of specified service providers. These include any banking institution other than eligible cooperative banks, including an insured service provider; insurance companies; any financial market infrastructure; any payment system, as defined under the Payment and Settlement Systems Act, 2007; any non-banking financial company; branch offices of body corporates incorporated outside India, carrying on the business of providing financial service here; and any other entity/ fund which may be notified by the government.

Note:

The FRDI Bill is far more depositor friendly than many other jurisdictions, which provide for statutory bail-in, where consent of creditors / depositors is not required for bail-in.

Highlights of the Bill
  • The Bill establishes a Resolution Corporation to monitor financial firms, anticipate risk of failure, take corrective action, and resolve them in case of such failure. The Corporation will also provide deposit insurance up to a certain limit, in case of bank failure.
  • The Resolution Corporation or the appropriate financial sector regulator may classify financial firms under five categories, based on their risk of failure. These categories in the order of increasing risk are: (i) low, (ii) moderate, (iii) material, (iv) imminent, and (v) critical.
  • The Resolution Corporation will take over the management of a financial firm once it is classified as ‘critical’. It will resolve the firm within one year (may be extended by another year).
  • Resolution may be undertaken using methods including: (i) merger or acquisition, (ii) transferring the assets, liabilities and management to a temporary firm, or (iii) liquidation. If resolution is not completed within a maximum period of two years, the firm will be liquidated. The Bill also specifies the order of distributing liquidation proceeds.
Key Issues and Analysis
  • The Resolution Corporation will exercise certain powers including: (i) classification of firms based on risk, and (ii) directing the management of a firm to return their performance based incentive. However, the Bill does not specify a review or appeal mechanism for aggrieved persons to challenge the decision of the Resolution Corporation.
  • A financial firm will have to be resolved within two years of being classified as ‘critical’. However, the point at which the resolution process ends is not specified in the Bill.
  • Under the Bill, the Resolution Corporation will take over a firm classified as ‘critical’. However, it may choose to resolve the firm. It is unclear why the Corporation is given a choice to undertake resolution.
  • The Bill specifies that the Corporation will take over the administration of a firm, and exercise the powers of the board of directors, as soon as the firm is classified as ‘critical’. However, it also allows the Corporation to supersede the board of a firm if it is classified as ‘critical’. The provision allowing the Corporation to supersede the board of a firm classified as ‘critical’ may be redundant.
  • The Bill requires financial firms to pay fees to the Resolution Corporation, including those specified in Clause 33. However, Clause 33 does not specify fees that these firms will be required to pay.

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