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,%
Recently, there have been multiple Naxal attacks on CRPF personnel in Chhattisgarh. Parliamentary Committees have previously examined the working of the Central Armed Police Forces (CAPFs). In this context, we examine issues related to functioning of these Forces and recommendations made to address them.
What is the role of the Central Armed Police Forces (CAPFs)?
Under the Constitution, police and public order are state subjects. However, the Ministry of Home Affairs (MHA) assists state governments by providing them support of the Central Armed Police Forces. The Ministry maintains seven CAPFs: (i) the Central Reserve Police Force, which assists in internal security and counterinsurgency, (ii) the Central Industrial Security Force, which protects vital installations (like airports) and public sector undertakings, (iii) the National Security Guards, which is a special counterterrorism force, and (iv) four border guarding forces, which are the Border Security Force, Indo-Tibetan Border Police, Sashastra Seema Bal, and Assam Rifles.
What is the sanctioned strength of CAPFs personnel compared to the actual strength?
As of January 2017, the sanctioned strength of the seven CAPFs was 10,78,514 personnel. However, 15% of these posts (1,58,591 posts) were lying vacant. Data from the Bureau of Police Research and Development shows that vacancies in the CAPFs have remained over the years. Table 1 shows the level of vacancies in the seven CAPFs between 2012 and 2017. 
The level of vacancies is different for various police forces. For example, in 2017, the Sashastra Seema Bal had the highest level of vacancies at 57%. On the other hand, the Border Security Force had 2% vacancies. The Central Reserve Police Force, which account for 30% of the sanctioned strength of the seven CAPFs, had a vacancy of 8%.
How often are CAPFs deployed?
According to the Estimates Committee of Parliament, the number of deployment of CAPFs battalions has increased from 91 in 2012-13 to 119 in 2016-17. The Committee has noted that there has been heavy dependence by states on central police forces even for day-to-day law and order issues. This is likely to affect anti-insurgency and border-guarding operations of the Forces, as well as curtail their time for training. The continuous deployment also leaves less time for rest and recuperation.
The Estimates Committee recommended that states must develop their own systems, and augment their police forces by providing adequate training and equipment. It further recommended that the central government should supplement the efforts of state governments by providing financial assistance and other help for capacity building of their forces.
What is the financial allocation to CAPFs?
Under the Union Budget 2018-19, an allocation of Rs 62,741 crore was made to the seven CAPFs. Of this, 32% (Rs 20,268 crore) has been allocated to the Central Reserve Police Forces. The Estimates Committee has pointed out that most of the expenditure of the CAPFs was on salaries. According to the Committee, the financial performance in case of outlays allocated for capacity augmentation has been very poor. For example, under the Modernization Plan-II, Rs 11,009 crore was approved for the period 2012-17. However, the allocation during the period 2013-16 was Rs 251 crore and the reported expenditure was Rs 198 crore.
What are the working conditions for CAPFs personnel?
The Standing Committee on Home Affairs in the year 2017 had expressed concern over the working conditions of personnel of the border guarding forces (Border Security Force, Assam Rifles, Indo-Tibetan Border Police, and Sashastra Seema Bal). The Committee observed that they had to work 16-18 hours a day, with little time for rest or sleep. The personnel were also not satisfied with medical facilities that had been provided at border locations.
In addition, the Standing Committee observed that personnel of the CAPFs have not been treated at par with the Armed Forces, in terms of pay and allowances. The demand for Paramilitary Service Pay, similar to Military Service Pay, had not been agreed to by the Seventh Central Pay Commission. Further, the Committee observed that the hard-area allowance for personnel of the border guarding forces was much lower as compared to members of the Armed Forces, despite being posted in areas with difficult terrain and harsh weather.
What is the status of training facilities and infrastructure available to CAPFs?
The Estimates Committee has noted that all CAPFs have set up training institutions to meet their training requirements and impart professional skills on specialised topics. However, the Committee noted that there is an urgent need to upgrade the curriculum and infrastructure in these training institutes. It recommended that while purchasing the latest equipment, training needs should also be taken care of, and if required, should be included in the purchase agreement itself. Further, it recommended that the contents of training should be a mix of conventional matters as well as latest technologies such as IT, and cyber security.
According to the Estimates Committee, the MHA has been making efforts to provide modern arms, ammunition, and vehicles to the CAPFs. In this regard, the Modernization Plan-II, for the period 2012-17, was approved by the Cabinet Committee on Security. The Plan aims to provide financial support to CAPFs for modernisation in areas of arms, clothing, and equipment.
However, the Committee observed that the procurement process under the Plan was cumbersome and time consuming. It recommended that the bottlenecks in procurement should be identified and corrective action should be taken. It further suggested that the MHA and CAPFs should hold negotiations with ordnance factories and manufacturers in the public or private sector, to ensure an uninterrupted supply of equipment and other infrastructure.
