The Indian government has announced a framework for resolution of stressed financial institutions, in the absence of a full-fledged law to deal with insolvency of banks and non-bank lenders. The new rules, issued under the Insolvency and Bankruptcy Code, 2016, will apply to systemically important financial service providers other than banks.
The current norms are a good stand-in for the proposed FRDI norms. The government has placed the onus of reference on regulators, which is an important move to ensure that no financial services provider faces unnecessary insolvency proceedings. It seems that the process would be similar to any corporate insolvency process being conducted right now, except the regulator would be closely involved with the resolution process.Abizer Diwanji, Head-Financial Services, EY
Who Will The Rules Apply To?
The government, in its statement, does not specify which financial services companies the rules will apply to, except to say that banks would not be subject to the interim framework.
“The rules shall apply to such financial service providers or categories of financial service providers, as will be notified by the central government under Section 227 from time to time in consultation with appropriate regulators, for the purpose of their insolvency and liquidation proceedings,” the statement said.
Bhargavi Zaveri of the Indira Gandhi Institute of Development Research said that while some financial service providers lend themselves to a resolution under the Insolvency and Bankruptcy Code, some don't.
“Like for banks and insurance service providers the cost of collective action is too high and going through IBC mechanism might not work. For them the scheme outlined in the FRDI could have worked, though that bill has been withdrawn,” Zaveri said. “But for some other financial services companies like brokerages or mutual funds, the IBC should work,” Zaveri added. She was, however, not in favour of giving discretionary powers to a regulator to take these decisions.
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