The Reserve Bank of India should have powers to set the affairs of a bank in order before it becomes insolvent, according to RBI Deputy Governor, Dr K. C. Chakrabarty.
Banks can face insolvency due to erosion in net worth, insufficient capital backing assets, and high default rate on the debt issued by them.
The Deputy Governor, in his address at an international conference on the role of deposit insurance in bank resolution framework in Jodhpur, said, a special legislation is needed to expand the resolution powers of the RBI. Further, a legislation is needed for the appointment of a temporary administrator to resolve the problems facing banks.
Emphasising the importance of making sweeping reforms to the deposit insurance system, Dr Chakrabarty said, it is necessary to broaden the mandate of the Deposit Insurance and Credit Guarantee Corporation from pay-box (to pay claims of depositors to the extent and in the manner stipulated by law) to resolving the problems of a troubled bank.
The DICGC should play a proactive role in early identification of bank failures and their effective resolution with the aim of protecting their funds and maintaining public confidence.
Monitoring of banks, taking prompt corrective action and finding and implementing the least-cost method of resolution of troubled banks would lead to faster settlement of claims to depositors.
“The ultimate way out is to put in place a clearly defined bank solvency regime and a properly designed resolution process,” said the Deputy Governor.
For depositors of failed banks to maintain confidence in the banking system, it is essential to provide depositors quick access to their funds. This will require technology upgradation, including the adoption of core banking solution by all urban co-operative banks (UCBs) and an effective interface between the DICGC and banks' CBS to access depositor databases.
Pointing out that there are delays in appointment of liquidators (by State Governments) for UCBs, Dr Chakrabarty said it will be beneficial to grant the Corporation the power to appoint and monitor liquidators so that depositor information can be obtained within a shorter timeframe.
IT exemption
About half of the Corporation's premium income, which is its main source of funds, is paid as income-tax to the Government.
In this regard, Dr Chakrabarty observed that since DICGC is a non-profit organisation serving social obligations of protection of small depositors, it should be exempted from payment of tax, as is done globally.
The tax exemption would enable the DICGC build up its fund base, provide higher coverage to depositors and even pass on the benefits to insured banks by reducing the rate of premium.
The Deputy Governor said it is surprising that in India, there is inadequate awareness about deposit insurance.
One reason for this could be that in India banks are perceived to be either too-big-to-fail or impossible to fail on account of the Government or RBI backing.
While this may be true for the public sector banks, it certainly does not hold good in the case of private sector banks, foreign banks operating in India and the large number of cooperative banks, added Dr Chakrabarty.