An article in Hindustan Times dated February 12, 2018, titled Reserve Bank Goes Back on its Opposition to the FRDI Bill claims that the Reserve Bank has retracted from its former position of three months back— which was the opposition to certain provisions of the Bill — and is now looking only for clarifications related to some provisions, especially the ones where the powers of the RBI and the proposed Resolution Corporation (RC) will overlap.
I just want to make one point: Let us not fall into the trap thinking that the RBI “can” have reservations about the Financial Resolution and Deposit Insurance Bill, 2017. No it cannot. Not when RBI itself contributed to bringing out this Bill.
It all started with the financial meltdown of 2008, wherein the governments of the developed countries, like the USA, had to step in to prevent the big banks from bankruptcy and thus, save their financial systems. The Financial Stability Board (FSB), an international body, was thus established by the G20 countries in April 2009 with a mandate to promote global financial stability.
Inspired from this, the Annual Policy Statement of April 2009 of the RBI proposed setting up a Financial Stability Unit (FSU) in the RBI “for carrying out periodic stress testing and for preparing financial stability reports.” The FSU was finally constituted on July 17, 2009 and was to provide the Secretariat to the RBI’s representative in the FSB.
Financial Stability Report (FSR) is a biannual publication of RBI’s Financial Stability Unit (FSU). The the first issue of FSR was published in March 2010. This report is published after approval from Financial Stability & Development Council’s (FSDC) Sub-Committee. It reviews “the nature, magnitude and implications of risks that may have a bearing on the macroeconomic environment, financial institutions, markets and infrastructure. These reports will also assess the resilience of the financial sector through stress tests.”
FSDC is an apex Council constituted vide GOI notification dated December 30, 2010. Its objective is to strengthen and institutionalise the mechanism for maintaining financial stability and development. It is chaired by the Union Finance Minister and its members are Governor, Reserve Bank of India; Finance Secretary and/or Secretary, Department of Economic Affairs; Secretary, Department of Financial Services; Chief Economic Adviser, Ministry of Finance; Chairman, Securities and Exchange Board of India; Chairman, Insurance Regulatory and Development Authority; and Chairman, Pension Fund Regulatory and Development Authority. The Council has one Sub-Committee which is chaired by the Governor, RBI.
Let us go back to how the RBI insisted on the FRDI Bill. On the need for resolution of bad loans, FSR of December 2015 states in Section 3.11 that “…the establishment of a resolution corporation for the financial sector, will also play an important role in this context.” This shows the clear push of RBI in favour of RC.
The June 2016 FSR claimed in Section 3.13 that “The resolution mechanism for financial entities needs to be dealt with separately. Several steps have been taken towards achieving the desired objective in this regard, in line with broad guidelines laid down by the Financial Stability Board (FSB).” In RBI’s FSR of December 2016, it is mentioned in Section 3.25 that “the setting up of Resolution Corporation would help India adhere to Financial Stability Board’s Key Attributes (FSB-KAs) of Effective Resolution Regimes for Financial Institutions by addressing the gaps in the current resolution mechanism in India in terms of legal framework, resolution tools, liquidation, coverage of entities, cross border cooperation and oversight framework.”
Clearly, the RBI agreed that the best way to deal with the non-performing assets (NPAs) included following the guidelines of the FSB. The FRDI Bill directly draws from the report of FSB titled “Key Attributes of Effective Resolution Regimes for Financial Institution” published in October 2014. It not just reproduces the models suggested by them but some sections of the FRDI Bill have been taken verbatim from the report. This includes the provisions of Resolution Corporation, bail in, and haircuts, to name a few. All of this was accepted without taking in consideration the uniqueness of Indian financial system. India’s public sector banks (PSBs) form the bedrock of Indian banking and make it different from that of other countries.
In such a situation, blindly following the guidelines of FSB without understanding its desirability and practicality in Indian context was highly irresponsible of the concerned authorities, including the RBI. The aim of the FSB guidelines was ensure the survival of financial institutions without the need of the governments to bail them out. This was accomplished by shifting the burden on the people, who will lose their savings if the resolution tools such as bail in are implemented.
Irresponsible not just towards the people of this country, but it shows the apathy of the RBI towards itself. With one sweep, the Resolution Corporation is taking away the traditional powers of the RBI and here is this organisation, gladly giving away its powers, shirking from its responsibilities.