The larger purpose of having a resolution authority is for acting in a timely manner and doing a restructuring to save the institution. Beyond banks , there are NBFCs , mutual funds and insurance companies where small savers investments are parked. A dedicated resolution corporation would go a long way in providing a comfort to all the stakeholders that their money is safe. Anand Adhikari, Executive editor, Business Today, explains. Watch the video for more.

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In recent years, the Indian banking sector has faced significant challenges, with two major banks, Yes Bank and IDBI Bank, requiring bailouts from the government. These bailouts have raised concerns about the stability and resilience of the banking system in the country. As a result, there is a growing recognition of the need for a Financial Resolution Authority (FRA) to address such crises and prevent similar situations in the future.

The bailouts of Yes Bank and IDBI Bank have highlighted the vulnerabilities within the Indian banking sector. These institutions were struggling with high levels of non-performing assets and liquidity issues, which ultimately led to their financial distress. The government intervention was necessary to prevent a collapse of these banks, which could have had far-reaching implications for the financial system and the economy as a whole.

The lack of a dedicated resolution mechanism for troubled financial institutions in India has been a major concern. The existing framework for resolving such crises is fragmented and inadequate, leading to ad-hoc measures that may not be sustainable or effective. This has underscored the need for a specialized FRA that can manage the resolution and restructuring of troubled banks in a comprehensive and systematic manner.

A FRA would provide a structured and transparent framework for resolving the financial distress of banks, ensuring that the process is fair, efficient, and in the public interest. It would have the necessary powers and tools to intervene in a timely manner, assess the financial situation of troubled banks, and take appropriate actions to stabilize and restructure them. This would help to mitigate the risks of systemic disruptions, protect the interests of depositors and creditors, and maintain the stability of the financial system.

Furthermore, a FRA would enhance accountability and transparency in the resolution process, as it would be required to operate within a clear legal and regulatory framework. This would help to build confidence in the banking sector and promote greater trust in the regulatory authorities. It would also ensure that the resolution decisions are based on objective criteria and are free from political interference or influence.

The establishment of a FRA would also contribute to the broader reform agenda for the Indian financial sector. It would complement the ongoing efforts to strengthen banking supervision, enhance risk management practices, and improve the resolution of distressed assets. It would also align with the global best practices for resolving financial crises, as recommended by international organizations such as the Financial Stability Board and the International Monetary Fund.

In conclusion, the bailouts of Yes Bank and IDBI Bank have underscored the urgent need for a dedicated Financial Resolution Authority in India. Such an institution would play a crucial role in managing and resolving the financial distress of troubled banks, thereby strengthening the resilience and stability of the banking sector. It is imperative for the authorities to expedite the establishment of a FRA and provide it with the necessary powers and resources to fulfill its mandate effectively. This would help to mitigate the risks posed by future banking crises and safeguard the interests of all stakeholders in the financial system.