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Cabinet gives green signal to bankruptcy framework for financial sector

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NEW DELHI: The union cabinet approved the Financial Resolution and Deposit Insurance Bill, 2017, that will complete the country’s bankruptcy framework after it’s passed by parliament. The legislation will help resolve insolvency in financial sector entities such as banks and insurance companies, a key element in one of the most significant reform initiatives of the Narendra Modi government.

At its meeting on Wednesday, the cabinet also approved a Rs 20,399-crore interest subvention scheme (ISS) for farmers for FY18. This will help farmers get short-term crop loans of up to Rs 3 lakh payable within one year at just 4% per annum, compared with the regular rate of 7%.

The Insolvency and Bankruptcy Code passed last year deals with the bankruptcy resolution of non-financial entities. The two laws will together cover all business entities.

“The proposed bill complements the code by providing a resolution framework for the financial sector. Once implemented, this bill together with the code will provide a comprehensive resolution framework for the economy,” the government said in a statement, adding that it will reduce the time and cost involved in resolving distressed financial entities. it seeks to “give comfort to the consumers of financial service providers in financial distress.”

“It also aims to inculcate discipline among financial service providers in the event of financial crises by limiting the use of public money to bail out distressed entities,” the government statement said, adding it would help maintain financial stability through preventive measures and also provide necessary instruments for dealing with any crisis.

The Reserve Bank of India on Tuesday identified 12 accounts totalling about 25% of current gross non-performing assets (NPAs) of the banking system for immediate reference for resolution under the Insolvency and Bankruptcy Code (IBC).

The bill, when enacted, will also pave the way for establishing the Resolution Corporation, a body that will oversee the resolution of distressed financial sector entities.

Once enacted, resolution-related provisions in sectoral Acts will be repealed or amended, and the Deposit Insurance and Credit Guarantee Corporation Act, 1961, will be repealed. Deposit insurance powers and responsibilities will be transferred to the Resolution Corporation.

Through this consolidation of the bankruptcy law for financial entities, the bill also aims to streamline the current framework of deposit insurance for the benefit of a large number of retail depositors.

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