Reserve Bank of India governor Shaktikanta Das on Saturday called for the setting up of a resolution corporation to revive failed financial firms.
Speaking at the State Bank of India economic conclave, Das said this proposal was part of the Financial Resolution and Deposit Insurance Bill 2017, which was later withdrawn.
The idea behind this resolution corporation is to ensure that a bank is resolved rather than liquidated, as depositors are expected to get a much higher value in resolution of the bank as a going concern than in liquidation.
“For banks and other financial institutions, traditionally the approach has been to merge a failed bank with a larger bank. While that definitely protects the depositors’ interest, it also tends to pulls down the balance sheet of the larger bank to which the failed bank is merged. In the case of Yes Bank, we tried for a market- based resolution. There were investors who had expressed interest. When that did not materialize, we then without adversely affecting the balance sheet of any participating bank worked out a public-private partnership. We need legislative backing to have some kind of resolution corporation which has to deal with resolution and revival of stressed financial firms,” Das said.
In the case of non-banking finance companies and housing finance companies, RBI is empowered by the Insolvency and Bankruptcy Code (IBC) to take over the administration of privately held financial services firms. Under those powers, RBI has now appointed an administrator for Dewan Housing Finance Corp Ltd (DHFL) and it has been referred to the NCLT.
Das also highlighted that RBI’s role even after the setting up of a legally backed resolution corporation will to be issue early warning signals and flag emerging risks. “Our primary focus is to identify vulnerabilities from a very incipient stage and then take corrective measures, impress upon the management, interact with them, ask them to take corrective measures, replacement of key personnel, mobilization of additional liquidity,” he said.
He said the economic impact of the pandemic could result in higher non-performing assets and capital erosion of banks. He stressed the need for banks and NBFCs to raise capital.
“The economic impact of the pandemic—due to lockdown and anticipated post-lockdown compression in economic growth—may result in higher non-performing assets and capital erosion of banks. A recapitalization plan for PSBs and private banks has, therefore, become necessary. While the NBFC sector as a whole may still look resilient, the redemption pressure on NBFCs and mutual funds need close monitoring,” he said.