Bank Liquidation Should Be Handled by IBBI-Certified IPs Under RBI, DICGC Oversight: IBBI Study

New Delhi, Oct 5 (KNN) Bank liquidation should be handled by insolvency professionals (IPs) under the supervision of the Reserve Bank of India (RBI) and Deposit Insurance and Credit Guarantee Corporation (DICGC), according to an Insolvency and Bankruptcy Board of India (IBBI) study.

At present, banks are outside the corporate insolvency framework of the Insolvency and Bankruptcy Code (IBC), and failed banks are dealt with under banking laws. RBI, DICGC and the relevant registrar have different roles, while liquidators are appointed under the existing bank liquidation framework.

IBBI-Certified IPs Proposed For Bank Liquidation

The study recommended bringing IBBI-certified IPs into the bank liquidation process to manage the remaining assets of failed banks, while retaining regulatory oversight with RBI and DICGC, the Financial Express reported.

The proposal would not bring banks fully under the IBC. Instead, the study said the framework could be introduced through regulatory changes or minor legislative amendments to bring greater expertise and accountability to bank liquidation.

Recovery After Deposit Insurance Remains Challenge

The study noted that more than 97 per cent of depositors in failed banks now receive their money from DICGC in a timely manner. Deposits are insured up to Rs 5 lakh per depositor.

However, recovering the failed bank's remaining assets after insured depositors are paid remains a major challenge. Once DICGC settles insured deposits, it becomes a creditor of the failed bank and must recover the amount from its remaining assets.

The study cited the 2019 collapse of Punjab & Maharashtra Co-operative Bank (PMC Bank), which had assets exceeding Rs 10,000 crore when a major fraud came to light. The bank was subsequently merged with Unity Small Finance Bank.

DICGC paid Rs 3,791.6 crore towards PMC Bank's insured deposits and thereafter carried the risk of recovering the amount from the bank's assets, including loans and collateral.

Madhavpura Bank was also cited as an example where an IP acting as liquidator could have provided clearer timelines and asset-resolution strategies, potentially improving recoveries for DICGC and other creditors.

Study Proposes Time-Bound Liquidation

The IBBI study recommended fixed timelines for bank liquidation, including completing claims verification within 60 days and auctioning properties within six months.

It also proposed quarterly public reporting, mandatory audits of liquidator accounts and a mechanism to replace underperforming liquidators.

The study further recommended giving DICGC additional resolution powers, including facilitating the transfer of deposits of a weak bank to another bank against assets.

As a longer-term measure, it suggested establishing a dedicated financial institution resolution authority to oversee the resolution and liquidation of financial institutions.

(KNN Bureau)