NEW DELHI: The finance ministry is looking at bringing a financial sector development and resolution bill in the winter session of Parliament, which will, among other things, set up a financial sector resolution authority with wide ranging powers over banks, insurance firms and financial intermediaries.
The contentious part of the proposed bill outlined in a finance ministry note crafted earlier was that the new authority—which would be taking on part of the job now performed by the RBI—would have omnibus powers to “terminate contracts, write down debts, modify liabilities.” This was seen by many analysts as a bid to bring in a bail in clause similar to the one in the earlier Financial Resolution & Deposit Insurance Bill.
The FRDI bill had been withdrawn a few years ago after a hue and cry was raised over the possibility of using this bail in clause to use ordinary bank depositors’ money to resuscitate sick banks. Officials said that they were in the process of redrafting sections of the bill. “We wish to assure depositors that their money will remain safe”. Several bank collapses and near collapses, including Yes Bank, PMC Bank etc., have left depositors jittery and North Bloc is aware of the political sensitivities involved in pushing through clauses which could lead to more nervous tremors among bank customers.
However, the exact nature of the changes will have to await the finalisation of the draft bill. Failure to clarify omnibus clauses such as the above could raise a political storm with opposition parties attacking the government on the proposed bill. Other clauses provide powers to the authority to amalgamate sick banks, insurers or financial firms, cancel part of their liabilities, or sell off assets. In the case of large financial companies like the IL&FS or large banks such as Yes Bank, considered ‘significant financial entities’, preemptive steps could be taken before they neared sickness.
There would be defined triggers to bring a troubled entity before the resolution authority. Officials said the bill and the setting up of the authority was “important as the economic downside may take time to correct and one impact which (they) fear is delinquencies among financial intermediaries, urban cooperative banks and firms in the niche lending space.” Earlier this week, former RBI Governor Raghuraman Rajan warned that the banking sector would likely to see an unprecedented increase in bad loan levels over the next six months.“The level of NPAs is going to be unprecedented in six months. we are in trouble and the sooner we recognise, the better it is,” he said. Gross NPAs with 12 public sector banks whose fourth quarter results have been declared alone stand at Rs 5.46 lakh crore.
Sharp rise in bad loans expected in near-term