Government to introduce resolution regime for banks

The budget envisages implementation of a resolution regime for Indian financial institutions. Resolution regime refers to the orderly settling of failing financial institutions at the same time without loss of public money and any serious disruption to the financial system.

Here, banks and FIs prepare a plan for the settling of the problem in prior if they faces financial weaknesses. In exact form resolution regime asks banks to prepare a plan for its funeral if it goes to fail. Advantage of resolution regime is that costly bailout using public money need not be made when a bank fails. Rather it will have own resources and it should be spend in accordance with the plan suggested by the banks.

Another purpose of resolution regime is that financial Institutions should be allowed to fail without risk to financial stability and without cost to tax payers.

If the central bank or government goes always to rescue failing institutions, it will create moral hazard or a belief in the banking system that their rescue is government’s responsibility. In this context, they may take more risk.

In 2014, an RBI appointed committee suggested the creation of a dedicated resolution plan for commercial banks that is different from other entities. At present, the country is moving towards a bankruptcy code. But banks need dedicated facility like a resolution regime that may be more efficient and suitable for them.