FINANCIAL RESOLUTION AND DEPOSIT INSURANCE BILL, 2017: KEY HIGHLIGHTS - PWC
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
Background
The outbreak of global financial crises in 2007–08 caused
panic amongst depositors regarding the lack of a regulated
framework or entity to avoid failure of financial institutions.
Key features of Countries around the world started developing legislative
the FRDI Bill frameworks to protect deposit holders and develop resolution
regimes to reduce systemic impact in case of failures.
In India, the absence of a comprehensive legal framework
Liquidation for the resolution of distressed financial firms has paved the
and powers of way for the Financial Resolution and Deposit Insurance Bill
the Tribunal (FRDI), 2017.
The rationale behind the introduction of the FRDI Bill is
to develop a resolution regime for financial institutions in
Risk to viability distress while protecting the interests of taxpayers. The FRDI
Bill aims to create an integrated framework which involves
the early detection of risks by continuously monitoring
Rundown on the financial firms. The Insolvency and Bankruptcy Code (IBC),
2016, is a strong framework for minimising the cost and time
controversial
incurred during the liquidation process. With IBC established,
‘bail-in’ clause FRDI is a step towards having an efficient and integrated
resolution structure to improve the resilience of the Indian
financial system.
Impact of the
FRDI Bill on
banks
Contact us
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
2 PwC
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
• Establishment of a Resolution Corporation: FRDI Bill in terms of the safety of the depositors, the government
Background The Central Government will establish a Resolution Corporation may have to increase the deposit insurance threshold tenfold to
with the power to enter into contracts, power to sue or get sued, protect 80–90% of deposits. Factors such as inflation and cost of
and power to acquire/hold/dispose properties. The members will living have to be kept in mind to fix the deposit insurance amount
Key features of include representatives from various financial regulators as well in the proposed bill as it has not been increased according to
the FRDI Bill as the Ministry of Finance. Some key functions and powers of the the economic situations in the past 25 years. However, with this
corporation are: anticipated increase in the deposit insurance threshold, whether
the premium would be borne by customers or banks is yet to
-- Provide deposit insurance to banking institutions;
Liquidation be cleared. The Corporate Insurance Fund will be used by the
-- Specify the criteria for classification of a specified service board of the corporation to pay a specified amount to a depositor
and powers of
provider into one of the categories of risk to viability; of a financial institution with respect to their deposit in case of
the Tribunal
-- Act as an administrator for service providers that have been liquidation of the service provider.
classified in the category of critical risk to viability; • Risk-based classification:
Risk to viability -- Exercise powers in relation to certain termination rights in Another key function of the corporation along with appropriate
respect of specified service providers; regulators is to assess and classify the insured service providers
based on the risk to viability. Five categories based on the
-- Resolve a specified service provider which has been classified in probability of failure of an insured service provider will help in
Rundown on the the category of critical risk to viability; the determination of risk to viability:
controversial -- Act as a liquidator for a specified service provider against which
‘bail-in’ clause an order of liquidation has been made; Category Probability of failure
-- Any other powers and functions as may be prescribed. Low Substantially below acceptable levels of
probability of failure
Impact of the • Deposit insurance:
Moderate Marginally below or equal to acceptable levels
FRDI Bill on The Deposit Insurance and Credit Guarantee Corporation
of probability of failure
banks (DICGC) is a subsidiary of the Reserve Bank of India. It was
established in 1978 under the Deposit Insurance and Credit Material Marginally above acceptable levels of
Guarantee Corporation Act, 1961, for the purpose of providing probability of failure
insurance of deposits and guaranteeing of credit facilities. Imminent Substantially above acceptable levels of
Contact us Currently, DICGC provides deposit insurance of up to 1 lakh INR probability of failure
and the rest of the amount is forfeited in the event of a bank Critical Substantially above acceptable levels of
failure. Under the proposed FRDI bill, the Resolution Corporation probability of failure and on the verge of failing
has the rights to fix the threshold for deposit insurance which to meet its obligations to its depositors
is not yet decided. In order to achieve the main objective of the
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
3 PwC
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
• Systematically Important Financial Institutions (SIFIs): two years at the maximum. Furthermore, if any of the above
Background The Central Government in consultation with the appropriate resolution strategies is not undertaken within two years, the
regulator would prescribe criteria. A financial service provider firm may be liquidated. For the purpose of liquidation and
that fails to meet these criteria will be designated as a SIFI. The distribution of assets, the corporation will require the approval
Key features of features of a financial service provider, such as (a) size, (b) of the National Company Law Tribunal to liquidate the assets of
the FRDI Bill complexity, (c) nature and volume of transactions with other the financial service provider in distress.
financial service providers, and (d) interconnectedness with
-- If liquidation and distribution of assets take place, the
other financial service providers and such other related criteria,
proceeds are given in priority to the corporation insurance
Liquidation may be prescribed. These would be taken into consideration
fund used for the deposit insurance, resolution costs, secured
and powers of while specifying an entity as a SIFI. With the theory of ‘too big
creditors, wages for employees, uninsured depositors,
to fail’ and their economic impact, the bill encompasses some
the Tribunal unsecured creditors, government dues, other debt and dues,
additional powers in respect of these SIFIs when it comes to their
and shareholders.
resolution or bankruptcy. All SIFIs are expected to provide the
required information in such frequency and manner as may be -- Penalties are imposed for fraudulent activities such as
Risk to viability prescribed by the Resolution Corporation, mainly to monitor concealment, destruction or falsification of evidence.
their safety, soundness and solvency. The Resolution Corporation Imprisonment with fines are also imposed as penalties for the
can inspect SIFIs in addition to sectoral regulators. It is specified highest nature of offences.
Rundown on the in the bill that the Central Government may by an order to be
controversial published in the official gazette appoint a body it constitutes to
‘bail-in’ clause discharge its powers and functions in respect of SIFIs.
• Resolution plan
Service providers falling under the imminent or critical risk
Impact of the category are obliged to provide resolution and restoration
FRDI Bill on plans to the corporation, which will include all the information
banks regarding assets and liabilities and resolution plans to improve
the risk categorisation.
-- Resolution methods proposed under the bill are mergers and
Contact us acquisitions, bridge service providers, transfer of all assets and
liabilities or bail-in.
-- When a financial service provider falls under the critical
risk to viability stage, the resolution by corporation must be
incorporated within one year which could be extended to
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
4 PwC
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
The National Company Law Appellate Tribunal or ‘Tribunal’ is a
Background quasi-judicial authority created under the Companies Act, 2013 to
handle corporate civil disputes arising under the act. It is an entity
that has powers and procedures like those vested in a court of
Key features of law or judge. The following are the powers and key functions
the FRDI Bill of the Tribunal:
• Where the corporation determines that liquidation is the most
appropriate method for the resolution of a specified service
Liquidation provider, the corporation shall make an application to the
and powers of Tribunal for an order of liquidation in respect of such specified
the Tribunal service provider. The Tribunal shall pass an order of liquidation
appointing the corporation as the liquidator for a specified
service provider.
Risk to viability • It provides the order of liquidation and may prohibit the
commencement or continuation of all legal actions and
proceedings against the service provider being liquidated till the
Rundown on the continuance of the period of liquidation. person, director or auditor shall attend and be publicly examined
controversial • It provides that on the appointment of the liquidator, all powers as to the conduct of the business of the specified service provider,
‘bail-in’ clause of the board of directors, key managerial personnel and the or as to his conduct and dealings.
partners of the service provider shall cease to have effect and • The Tribunal also has the powers to provide for public
shall vest in the liquidator. examination of directors and auditors of a specified service
Impact of the • It deems the order of liquidation to be a notice of discharge provider being liquidated by the corporation. It provides that if
FRDI Bill on to the officers, employees and workmen of the specified the liquidator is of the opinion that any promoter or any person
banks service provider. has taken part in the conduct of business of the specified service
provider or has been a director or an auditor of the specified
• The bill provides that if the liquidator is of the opinion that any service provider, they can be publicly examined.
person who has taken part in the conduct of business of the
Contact us service provider or has been a director or an auditor of the service
provider should be publicly examined, it may file an application
before the Tribunal to hold a public sitting on a date to be
appointed for that purpose and the Tribunal may direct that such
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
5 PwC
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
The FRDI Bill provides for detecting emerging insolvencies in
Background financial firms by introducing a five-stage health classification of
financial firms and stepping in to appropriately recover a financial
firm at the stage when its health becomes weak and it is classified in
Key features of the category of material risk to viability, much before it is classified
the FRDI Bill in the category of critical risk to viability when the need for
resolution or liquidation arises.
• In the material risk to viability stage, the corporation identifies
Liquidation the financial health of a service provider as weak when it is
and powers of marginally above the level of acceptable probability of failure.
the Tribunal • In the imminent risk to viability stage, the probability of failure is
substantially above the probability of failure.
• During these stages, the firms under risk need to develop
Risk to viability
restoration plans to be submitted to the regulator and the
corporation. The restoration plan involves developing strategies
and including steps to be undertaken to be classified under at least
Rundown on the moderate risk if not low risk to viability.
controversial
• In the critical risk to viability stage, the resolution plan includes
‘bail-in’ clause the formulation of an exit strategy which makes the firm move to
the stage. During this stage, the financial service provider fails to
meet the obligations towards its depositors and is on the verge
Impact of the of failing.
FRDI Bill on
• In the critical stage, the corporation will take over the
banks management of the financial service provider in distress from the
date the firm has been identified as critical. The exit strategy has
to be submitted to the corporation, which would involve various
Contact us resolution tools or a liquidation process in a rare event.
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
6 PwC
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
One of the resolution tools that the corporation may undertake has also emphasised its implicit guarantee of a public sector bank’s
Background is ‘bail-in’ in case of the failure of a financial institution. This has solvency, stating that since they fall under the jurisdiction of the
created a stir amongst depositors and bank unions because it poses government, the bail-out procedure would take place if needed,
a threat to their deposits with various public sector banks. This eliminating the need for a bail-in. However, this implicit guarantee
Key features of bail-in clause gives statutory rights to the government to convert increases the moral hazard and leads to risky behaviour by banks
the FRDI Bill depositors’ money into equity and convert existing depositors into and poor monitoring of deposits. Another important clarification
shareholders in order to recapitalise the financial institution in was that the cancellation of the liability of a depositor beyond the
distress. This is the opposite of a bail-out wherein the government insured amount cannot take place without his or her prior consent.
Liquidation or an external agency helps the banks in distress. The only amount The bail-in clause as a restoration plan can only be used in private
and powers of that cannot be used for a bail-in is the amount under deposit banks, and is also considered as a last resort by the Resolution
insurance. In order to avoid bank runs on public sector banks, the Corporation. The government needs to acknowledge the fact that
the Tribunal
government has cleared the air regarding the clause. The bail-in private banks hold 25% of the deposits in the country and the need
clause will not be used for public sector banks. The government for protection of these private bank depositors also exists.
Risk to viability
Rundown on the
controversial
‘bail-in’ clause
Impact of the
FRDI Bill on
banks
Contact us
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
7 PwCFinancial Resolution and Deposit Insurance Bill, 2017: Key highlights
Background
The FRDI Bill has proved to be a controversial bill for various
reasons. Some of the key impacts of the bill on banks are
discussed below:
Key features of
• The FRDI Bill has been introduced for the sole purpose of
the FRDI Bill
providing a comprehensive resolution regime for distressed
companies in the financial sector, such as banks, insurance
companies and financial institutions.
Liquidation
and powers of • The bill aims to protect large numbers of retail depositors and
the Tribunal customers of financial service providers.
• By providing a comprehensive resolution mechanism, the FRDI
Bill, along with the IBC, will facilitate the reduction of NPAs
Risk to viability and also maintaining stability in the economy.
• It promotes ease of doing business in the country, improves
financial inclusion and increases access to credit, which may
Rundown on the also reduce the cost for obtaining credit.
controversial • Once enacted, the Resolution Corporation aims to strengthen
‘bail-in’ clause the stability and resilience of the entities in the financial sector.
Impact of the
FRDI Bill on
banks
Contact us
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
8 PwCFinancial Resolution and Deposit Insurance Bill, 2017: Key highlights
Background
Vivek Iyer Dnyanesh Pandit
Partner Director
Key features of vivek.iyer@pwc.com dnyanesh.pandit@pwc.com
the FRDI Bill Mobile: +91 9167745318 Mobile: +91 9819446928
Liquidation
and powers of
the Tribunal
Vernon Dcosta Rajeev Khare
Director Manager
vernon.dcosta@pwc.com rajeev.khare@pwc.com
Risk to viability Mobile: +91 9920651117 Mobile: +91 9702942146
Rundown on the
controversial
‘bail-in’ clause Vidhi Trivedi
Consultant
vidhi.trivedi@pwc.com
Impact of the Mobile: +91 98203 41011
FRDI Bill on
banks
Contact us
Financial Resolution and Deposit Insurance Bill, 2017: Key highlights
9 PwCAbout PwC At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 158 countries with more than 2,36,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com In India, PwC has offices in these cities: Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune. For more information about PwC India’s service offerings, visit www.pwc.com/in PwC refers to the PwC International network and/or one or more of its member firms, each of which is a separate, independent and distinct legal entity. Please see www.pwc.com/structure for further details. © 2018 PwC. All rights reserved pwc.in Data Classification: DC0 This document does not constitute professional advice. The information in this document has been obtained or derived from sources believed by PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete. Any opinions or estimates contained in this document represent the judgment of PwCPL at this time and are subject to change without notice. Readers of this publication are advised to seek their own professional advice before taking any course of action or decision, for which they are entirely responsible, based on the contents of this publication. PwCPL neither accepts or assumes any responsibility or liability to any reader of this publication in respect of the information contained within it or for any decisions readers may take or decide not to or fail to take. © 2018 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity. VB/March2018-12279
You can also read
