The Financial Resolution and Deposit Insurance Bill, 2017 was introduced in Parliament during Monsoon Session 2017.[1] The Bill proposes to create a framework for monitoring financial firms such as banks, insurance companies, and stock exchanges; pre-empt risk to their financial position; and resolve them if they fail to honour their obligations (such as repaying depositors). To ensure continuity of a failing firm, it may be resolved by merging it with another firm, transferring its assets and liabilities, or reducing its debt. If resolution is found to be unviable, the firm may be liquidated, and its assets sold to repay its creditors.
After introduction, the Bill was referred to a Joint Committee of Parliament for examination, and the Committee’s report is expected in the Winter Session 2017. The Committee has been inviting stakeholders to give their inputs on the Bill, consulting experts, and undertaking study tours. In this context, we discuss the provisions of the Bill and some issues for consideration.
What are financial firms?
Financial firms include banks, insurance companies, and stock exchanges, among others. These firms accept deposits from consumers, channel these deposits into investments, provide loans, and manage payment systems that facilitate transactions in the country. These firms are an integral part of the financial system, and since they transact with each other, their failure may have an adverse impact on financial stability and result in consumers losing their deposits and investments.
As witnessed in 2008, the failure of a firm (Lehman Brothers) impacted the financial system across the world, and triggered a global financial crisis. After the crisis, various countries have sought to consolidate their laws to develop specialised capabilities for resolving failure of financial firms and to prevent the occurrence of another crisis. [2]
What is the current framework to resolve financial firms? What does the Bill propose?
Currently, there is no specialised law for the resolution of financial firms in India. Provisions to resolve failure of financial firms are found scattered across different laws.2 Resolution or winding up of firms is managed by the regulators for various kinds of financial firms (i.e. the Reserve Bank of India (RBI) for banks, the Insurance Regulatory and Development Authority (IRDA) for insurance companies, and the Securities and Exchange Board of India (SEBI) for stock exchanges.) However, under the current framework, powers of these regulators to resolve similar entities may vary (e.g. RBI has powers to wind-up or merge scheduled commercial banks, but not co-operative banks.)
The Bill seeks to create a consolidated framework for the resolution of financial firms by creating a Resolution Corporation. The Resolution Corporation will include representatives from all financial sector regulators and the ministry of finance, among others. The Corporation will monitor these firms to pre-empt failure, and resolve or liquidate them in case of such failure.
How does the Resolution Corporation monitor and prevent failure of financial firms?
Risk based classification: The Resolution Corporation or the regulators (such as the RBI for banks, IRDA for insurance companies or SEBI for the stock exchanges) will classify financial firms under five categories, based on their risk of failure (see Figure 1). This classification will be based on adequacy of capital, assets and liabilities, and capability of management, among other criteria. The Bill proposes to allow both, the regulator and the Corporation, to monitor and classify firms based on their risk to failure.
Corrective Action: Based on the risk to failure, the Resolution Corporation or regulators may direct the firms to take certain corrective action. For example, if the firm is at a higher risk to failure (under ‘material’ or ‘imminent’ categories), the Resolution Corporation or the regulator may: (i) prevent it from accepting deposits from consumers, (ii) prohibit the firm from acquiring other businesses, or (iii) require it to increase its capital. Further, these firms will formulate resolution and restoration plans to prepare a strategy for improving their financial position and resolving the firm in case it fails.
While the Bill specifies that the financial firms will be classified based on risk, it does not provide a mechanism for these firms to appeal this decision. One argument to not allow an appeal may be that certain decisions of the Corporation may require urgent action to prevent the financial firm from failing. However, this may leave aggrieved persons without a recourse to challenge the decision of the Corporation if they are unsatisfied.
Figure 1: Monitoring and resolution of financial firms
How will the Resolution Corporation resolve financial firms that have failed?
The Resolution Corporation will take over the administration of a financial firm from the date of its classification as ‘critical’ (i.e. if it is on the verge of failure.) The Resolution Corporation will resolve the firm using any of the methods specified in the Bill, within one year. This time limit may be extended by another year (i.e. maximum limit of two years). During this period, the firm will be immune against all legal actions.
The Resolution Corporation can resolve a financial firm using any of the following methods: (i) transferring the assets and liabilities of the firm to another firm, (ii) merger or acquisition of the firm, (iii) creating a bridge financial firm (where a new company is created to take over the assets, liabilities and management of the failing firm), (iv) bail-in (internally transferring or converting the debt of the firm), or (v) liquidate the firm to repay its creditors.
If the Resolution Corporation fails to resolve the firm within a maximum period of two years, the firm will automatically go in for liquidation. The Bill specifies the order of priority in which creditors will be repaid in case of liquidation, with the amount paid to depositors as deposit insurance getting preference over other creditors.
While the Bill specifies that resolution will commence upon classification as ‘critical’, the point at which this process will end may not be evident in certain cases. For example, in case of transfer, merger or liquidation, the end of the process may be inferred from when the operations are transferred or liquidation is completed, but for some other methods such as bail-in, the point at which the resolution process will be completed may be unclear.
Does the Bill guarantee the repayment of bank deposits?
The Resolution Corporation will provide deposit insurance to banks up to a certain limit. This implies, that the Corporation will guarantee the repayment of a certain amount to each depositor in case the bank fails. Currently, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides deposit insurance for bank deposits up to 1 lakh rupees per depositor.[3] The Bill proposes to subsume the functions of the DICGC under the Resolution Corporation.
[1]. The Financial Resolution and Deposit Insurance Bill, 2017, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/Financial%20Resolution%20Bill,%202017.pdf
[2]. Report of the Committee to Draft Code on Resolution of Financial Firms, September 2016, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/FRDI%20Bill%20Drafting%20Committee%20Report.pdf
[3]. The Deposit Insurance and Credit Guarantee Corporation Act, 1961, http://www.prsindia.org/uploads/media/Financial%20Resolution%20Bill,%202017/DICGC%20Act,%
Yesterday, Members of Parliament in Lok Sabha discussed the situation of drought and drinking water crisis in many states. During the course of the discussion, some MPs also raised the issue of ground water depletion. Last month, the Bombay High Court passed an order to shift IPL matches scheduled for the month of May out of the state of Maharashtra. The court cited an acute water shortage in some parts of the state for its decision. In light of water shortages and depletion of water resources, this blog post addresses some frequently asked questions on the extraction and use of ground water in the country. Q: What is the status of ground water extraction in the country? A: The rate at which ground water is extracted has seen a gradual increase over time. In 2004, for every 100 units of ground water that was recharged and added to the water table, 58 units were extracted for consumption. This increased to 62 in 2011.[1] Delhi, Haryana, Punjab and Rajasthan, saw the most extraction. For every 100 units of ground water recharged, 137 were extracted. In the recent past, availability of ground water per person has reduced by 15%. In India, the net annual ground water availability is 398 billion cubic metre.[2] Due to the increasing population in the country, the national per capita annual availability of ground water has reduced from 1,816 cubic metre in 2001 to 1,544 cubic metre in 2011. Rainfall accounts for 68% recharge to ground water, and the share of other resources, such as canal seepage, return flow from irrigation, recharge from tanks, ponds and water conservation structures taken together is 32%. Q: Who owns ground water? A: The Easement Act, 1882, provides every landowner with the right to collect and dispose, within his own limits, all water under the land and on the surface.[9] The consequence of this law is that the owner of a piece of land can dig wells and extract water based on availability and his discretion.[10] Additionally, landowners are not legally liable for any damage caused to water resources as a result of over-extraction. The lack of regulation for over-extraction of this resource further worsens the situation and has made private ownership of ground water common in most urban and rural areas. Q: Who uses ground water the most? What are the purposes for which it is used? A: 89% of ground water extracted is used in the irrigation sector, making it the highest category user in the country.[3] This is followed by ground water for domestic use which is 9% of the extracted groundwater. Industrial use of ground water is 2%. 50% of urban water requirements and 85% of rural domestic water requirements are also fulfilled by ground water. 
The main means of irrigation in the country are canals, tanks and wells, including tube-wells. Of all these sources, ground water constitutes the largest share. It provides about 61.6% of water for irrigation, followed by canals with 24.5%. Over the years, there has been a decrease in surface water use and a continuous increase in ground water utilisation for irrigation, as can be seen in the figure alongside. [4] Q: Why does agriculture rely most on ground water? A: At present, India uses almost twice the amount of water to grow crops as compared to China and United States. There are two main reasons for this. First, power subsidies for agriculture has played a major role in the decline of water levels in India. Since power is a main component of the cost of ground water extraction, the availability of cheap/subsidised power in many states has resulted in greater extraction of this resource.[5] Moreover, electricity supply is not metered and a flat tariff is charged depending on the horsepower of the pump. Second, it has been observed that even though Minimum Support Prices (MSPs) are currently announced for 23 crops, the effective price support is for wheat and rice.[6] This creates highly skewed incentive structures in favour of wheat and paddy, which are water intensive crops and depend heavily on ground water for their growth. It has been recommended that the over extraction of ground water should be minimized by regulating the use of electricity for its extraction.[7] Separate electric feeders for pumping ground water for agricultural use could address the issue. Rationed water use in agriculture by fixing quantitative ceilings on per hectare use of both water and electricity has also been suggested.[8] Diversification in cropping pattern through better price support for pulses and oilseeds will help reduce the agricultural dependence on ground water.[6] [1] Water and Related Statistics, April 2015, Central Water Commission, http://www.cwc.gov.in/main/downloads/Water%20&%20Related%20Statistics%202015.pdf. [2] Central Ground Water Board website, FAQs, http://www.cgwb.gov.in/faq.html. [3] Annual Report 2013-14, Ministry of Water Resources, River Development and Ganga Rejuvenation, http://wrmin.nic.in/writereaddata/AR_2013-14.pdf. [4] Agricultural Statistics at a glance, 2014, Ministry of Agriculture; PRS. [5] Report of the Export Group on Ground Water Management and Ownership, Planning Commission, September 2007, http://planningcommission.nic.in/reports/genrep/rep_grndwat.pdf. [6] Report of the High-Level Committee on Reorienting the Role and Restructuring of Food Corporation of India, January 2015, http://www.fci.gov.in/app/webroot/upload/News/Report%20of%20the%20High%20Level%20Committee%20on%20Reorienting%20the%20Role%20and%20Restructuring%20of%20FCI_English_1.pdf. [7] The National Water Policy, 2012, Ministry of Water Resources, http://wrmin.nic.in/writereaddata/NationalWaterPolicy/NWP2012Eng6495132651.pdf. [8] Price Policy for Kharif Crops- the Marketing Season 2015-16, March 2015, Commission for Agricultural Costs and Prices, Department of Agriculture and Cooperation, Ministry of Agriculture, http://cacp.dacnet.nic.in/ViewReports.aspx?Input=2&PageId=39&KeyId=547. [9] Section 7 (g), Indian Easement Act, 1882. [10] Legal regime governing ground water, Sujith Koonan, Water Law for the Twenty-First Century-National and International Aspects of Water Law Reform in India, 2010.
