The proposal is part of the Financial Resolution and Deposit Insurance Bill, 2017, which has been referred to the Parliamentary committee that proposes to establish a Resolution Corporation to monitor financial firms, anticipate the risk of their failure, take corrective action, and work out a resolution plan.
In case of a bank failure, the proposed corporation will also provide deposit insurance up to a certain limit, which has not been specified. Currently, bank deposits up to Rs 1 lakh are insured but there are few banks that have failed in India in recent years as the Reserve Bank of India (RBI) has stepped in to work out a resolution plan without creating any risk for depositors.
Once a financial services company, including a bank, slips into critical category, the Resolution Corporation will take over the firm and prepare aresolution plan during a year, which can be extended by another 12 months. The controversial provision of 'bail in' has been suggested, among various options, to resolve the stressed financial services companies. The other options include mergers, transfer of assets and liabilities to another entity, a bridge financial firm (where a new company is set up to take over the assets, liabilities and management as was the case with UTI), or liquidation via the National Company Law Tribunal.
The bill has suggested that the use of the 'bail-in' provision may result in cancellation of a liability, which could extend to bank deposits, or could lead to modification of the terms or changing the form of the asset class.
The Parliamentary panel is expected to submit its report, which will be considered by the Union Cabinet before the Bill is tabled in Parliament again. But the plan has generated a lot of heat with bank unions as well as political parties criticising the move that has the potential to use deposits, beyond the insured amount, for reviving the bank.
On Friday, the government hinted at reworking the provision. "Drafting is still on. A lot of corrections will take place," finance minister Arun Jaitley told reporters after the Cabinet briefing.