Page 42 - Banking Finance April 2018

ARTICLE

into five categories of risk to viability viz., low, moderate,
material, imminent and critical. Such classification shall be
made after taking into consideration the adequacy of
capital, assets and liability, asset quality, capability of
management, earnings sufficiency, leverage ratio, liquidity
of the covered service provider, sensitivity of the covered
service provider to adverse market conditions, compliance
with applicable laws, risk of failure of a holding company of
a covered service provider or a connected body corporate
in India or abroad.

The five stages of risk to viability framework: The Resolution Corporation has been vested with the
power to classify in the category of 'imminent' risk to
Y Low risk to viability - The probability of failure of a
ability, if the covered service provider fails to submit a
covered service provider is substantially below the
Resolution Plan to the Corporation after being ordered
acceptable probability of failure.
to so or it is determined that there has been fraud in
Y Moderate risk to viability - The probability of failure of the business of the covered service provider. The
a covered service provider is marginally below or equal Appropriate Authority as well as the Resolution
to acceptable probability of failure.
Corporation has power to classify the covered service
Low and moderate risk to viability - Resolution provider into this category, however, in case of central
Corporation shall not have power to investigate or enter counterparties, only an Appropriate Authority has been
the premises and call for information/ documents unless authorized to classify into fourth stage of categories.
the covered service provider has been classified as Y Critical risk to viability - The probability of failure of a
imminent or critical. However, SIFIs are required to
covered service provider is substantially above the
submit the 'resolution plan' and 'restoration plan' acceptable probability of failure. On being classified as
irrespective of the risk of viability. Also, such companies 'critical' risk to viability, the procedure for resolution
can be jointly inspected by the Resolution Corporation
shall commence and the Corporation shall be deemed
and the Appropriate Authority. to be a receiver of such covered service provider.
Y Material risk to viability - The probability of failure of a
covered service provider is marginally above acceptable Monitoring and Resolution of Financial
probability of failure.
Firms
If a covered service provider has been classified as
The Corporation and regulators will monitor financial firms
'material risk to viability', such entity shall submit a
based on their risk of failure. As this risk increases above
'resolution plan' and 'restoration plan' to Resolution
acceptable levels (under 'material' or 'imminent' categories),
Corporation and Appropriate Authority, respectively,
the Corporation or the regulator may direct the firm to take
within thirty days of such classification. If the covered
certain actions to mitigate risk of failure. These include:
service provider has been classified as 'material risk to
(i) Preventing the firm from accepting deposits,
viability' by the Appropriate Regulator, and if the Board
has difference in the opinion, then the Board shall record (ii) Prohibiting it from acquiring other businesses, or
its reason in writing and convey the same to the (iii) Increasing its capital.
Appropriate Regulator. Also, the Board may conduct
independent inspection, if it continues to hold a Further, firms in the 'material' and 'imminent' categories will
different view. formulate resolution and restoration plans. The Corporation

Y Imminent risk to viability - The probability of failure of may supersede the board of a firm, if it is classified under
a covered service provider is substantially above the the 'imminent' or 'critical' categories, for a maximum period
acceptable probability of failure. two years.

42 | 2018 | APRIL | BANKING FINANCE