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RBI governor calls for resolution corporation for stressed lenders

Published : Sunday, 12 July, 2020 at 12:00 AM  Count : 289

MUMBAI, July 11: Reserve Bank of India governor Shaktikanta Das has made a case for a resolution corporation that will revive stressed banks and finance companies 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 A bill which proposed the corporation in 2017, was withdrawn following criticism of a clause that sought to share cost of revival with depositors.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 interest it does pull down the balance sheet of the larger bank with which the failed bank is merged," said Das. He was responding a question to SBI chairman Rajnish Kumar on whether a resolution corporation could address failures like Yes Bank in 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, as losses are very high, eroding deposits by more than 50per cent.
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corporation was part of the financial resolution and deposit insurance bill introduced in 2017 but subsequently withdrawn for closer consideration.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. Since the bill was withdrawn the government has hiked deposit insurance from Rs 1 lakh to Rs 5 lakh.
"We need a structured mechanism with the legal backing to deal with stressed assets. In the case of Yes Bank, we tried for a market-based resolution driven by investors showed. When that did not materialise, without adversely impacting the balance sheet of any participating bank we worked out this arrangement of public-private partnership and had a lot of discussion with banks and came up with the mechanism," said Das.
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. "Using the power, RBI has appointed administrator in DHFL. The resolution is going fairly well and we are monitoring it," said Das.
Das said that RBI could only issue early warning signals, flag emerging risks and continue to take measures to interact with management to identify vulnerabilities but there has to be a legally backed arrangement for resolution of failed institutions.
The governor's observation comes amid an economic downturn caused by the COVID pandemic, which has raised the possibility of a sharp increase in borrower defaults. Das said RBI is using a lot of new technology for offsite surveillance using new systems for collecting and analysing data to identify stress.    -TNN






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