Page 41 - Banking Finance April 2018

ARTICLE

entities such as banks and insurance companies etc. The iii) Material
insolvency code Act deals with companies in all other sectors iv) Imminent and
(Non-financial institutions). Purpose of the Bill is to create a
v) Critical
resolution regime for financial institutions when they face
crisis without creating financial burden for the tax payers. Y The Resolution Corporation will take over the
management of a financial firm once it is classified as
The Bill will apply to 'Critical'. It will resolve the firm within one year (may
a. Banks be extended by another year).
b. Insurance Companies Y Resolution may be undertaken using methods including:
i) Merger or Acquisition
c. Stock Exchanges
ii) Transferring the Assets, Liabilities and Management
d. Depositories
to a temporary firm, or
e. Payment systems
iii) Liquidation
f. Non-banking financial companies and their parent
companies. If resolution is not completed with a maximum period of two
years, the firm will be liquidated. The Bill also specifies the
The central government may notify any other entities or order of distributing liquidation proceeds.
funds to be covered under the Bill.
Important Provisions
Key Objectives and Features of the Bill Y Systemically important financial institutions (SIFIs): The

Y The Bill establishes a 'Resolution Corporation' to monitor central government may designate a financial firm as a
financial firms, anticipate risk of failure, take corrective SIFI. This would include financial firms whose failures
action, and resolve them in case of such failure. The may have a significant impact on the stability of the
Corporate will also provide deposit insurance upto a financial system.
certain limit, in case of bank failure. Y Offences: The Bill specifies penalties for certain offences
Y The 'Resolution Corporation' or the appropriate financial committed by members of a financial firm. These
sector regulator may classify financial firms under Five offences include concealment of property and
Categories, based on their risk of failure. These destruction or falsification of evidence. Penalties will
categories in the order of increasing risk are: vary based on the nature of the offence, with the
i) Low maximum penalty being imprisonment for five years,
along with a fine.
ii) Moderate
Y Funds: The Corporation will constitute three Funds: (i)
Corporation Insurance Fund for deposit insurance, (ii)
Corporation Resolution Fund for resolution expenses,
and (iii) Corporation General Fund for all other
functions.
Y Bar on jurisdiction: The Bill prohibits any court or
tribunal from entertaining matters related to the
decisions of the Resolution Corporation or regulators,
unless specified in the Bill.

Details of Risk based Classification

The Board in consultation with the Appropriate Regulator
has been empowered to classify the covered service provider

BANKING FINANCE | APRIL | 2018 | 41