The Reserve Bank of India (RBI) governor Shaktikanta Das has called for setting up a ‘resolution corporation’ to deal with stressed financial firms in the country.
Das said that the new agency will ensure that financial firms are not liquidated.
This is because depositors get better interest rates in the resolution of the bank than in its liquidation after it has failed.
Das said: “For banks and other financial institutions, traditionally the approach has been to merge a failed bank with a larger bank.
“While that definitely protects the depositors’ interest, it also tends to pull down the balance sheet of the larger bank to which the failed bank is merged.
“We need legislative backing to have some kind of Resolution Corporation which has to deal with resolution and revival of stressed financial firms.”
However, even after establishing a resolution corporation, the central bank needs to stay vigilant and flag emerging risks for such entities, Das added.
He said that the Covid-19 pandemic may cause the non-performing assets (NPAs) to go higher and stressed on raising capital by both banks, as well as non-banking finance companies (NBFCs).
As a result, banks and NBFCs have been advised to gauge Covid-19’s impact on their balance sheet, asset quality, liquidity, profitability and capital adequacy for FY2020-21.
The governor added: “Our primary focus is to identify vulnerabilities from a very incipient stage and then take corrective measures, impress upon the management, interact with the management, ask them to take corrective measures, replacement of key personnel, and mobilisation of additional liquidity.”
In the case of NBFCs, RBI can appoint an administrator for privately-held failed entities.