The union government has planned to increase the deposit insurance limit to Rs 5 lakh from the existing Rs 1 lakh. The move will make banks obligated to pay Rs 5 lakh to its depositors in case of failure, reported the Indian Express. The Ministry of Finance has also come up with an idea to put forward a comprehensive resolution framework to help the financial sectors by preventing failures of the financial companies and in case of their failure, limiting their wider-reaching impact on the financial system as the crises are deepening and the threat of failures hinge on multiple financial institutions, the English daily further reported. The government is likely to roll out the framework under a new law and has planned to set up a Resolution Authority comprising of officials from the financial sectors as well as senior government officials.
Banks, NBFCs, insurance companies, securities market players, co-operative banks and regional rural banks which have been in news recently for all the wrong reasons will come under the jurisdiction of the proposed resolution authority. The government has reached a conclusion after a series of discussions including during meetings of the Financial Stability and Development Council. The government had, in 2018 withdrawn its proposal of Financial Resolution and Deposit Insurance (FRDI) Bill over the fears of the government’s power on deposits in banks due to the presence of a bail-in clause in the bill. The newly proposed framework, being developed by the Department of economic affairs may water down some of the provisions under the resolution framework to provide protection to the depositors.
“The Bill is expected to come in the Parliament after it is cleared by the Union Cabinet. Department of Economic Affairs has been piloting it and is expected to be ready with it. The bail-in provision was controversial and the government would truncate the issue and bring it. So, the government would be coming up with the revised version of the bill,” a senior government official told The Indian Express.
The government had amended the Insolvency and Bankruptcy Code (IBC) rules to provide resolutions for financial service providers (FSP) including NBFCs in November 2019. The move paid dividends immediately as the Reserve Bank of India moved swiftly for the resolution of DHFL. However, the move fell short of providing a comprehensive solution to all the financial sector entities in general and hence the government felt the need to bring in this new proposal contemplating threats to the country’s financial health, added The Indian Express citing government officials.