MUMBAI: The Reserve Bank of India (RBI) governor Shaktikanta Das has made a case for a resolution corporation that will revive stressed banks as an alternative to the traditional practice of merging failed institutions with stronger ones. A bill which proposed the corporation in 2017, was withdrawn following criticism of a clause that sought to share cost of revival with depositors.
“The traditional approach has been to merge a failed bank with a larger bank. While it does protect the depositor’s interest it does pull down the balance sheet of the larger bank with which the failed bank is merged,” said Das, while responding to a question from SBI chairman Rajnish Kumar on whether a resolution corporation could address failures like Yes Bank, during SBI’s online Economic Conclave on Saturday.
Earlier in his speech, the governor said that in the case of Punjab & Maharashtra Co-operative (PMC) Bank, the RBI is engaged with all stakeholders to find out a workable solution.
Creation of a resolution corporation was part of the financial resolution and deposit insurance bill introduced in 2017 but subsequently withdrawn for closer consideration. One of the controversial items in the bill was the ‘bail-in’ clause where creditors sacrifice part of their dues like in an insolvency process. Although bank deposits are secured only to the extent of deposit insurance, creditors to commercial banks have not lost money as failed banks were always merged with stronger banks.
The governor pointed out that a revision to the Insolvency and Bankruptcy Code had given RBI powers to initiate a resolution process for finance companies.
Das also said that the RBI could only issue early warning signals, flag emerging risks and continue to take measures to interact with the management to identify vulnerabilities but there has to be a legally-backed arrangement for resolution of failed institutions.