Government of India Volume I: Analysis and Recommendations

Table of Recommendations 7.7 Funding of resolution and insurance coverage
RESOLUTION
Funding the costs of resolution and consequent payouts are incorporated in the draft Code. The resolution corporation
must create a resolution fund. The draft Code enables the resolution corporation to:
1. Expand the coverage of traditional deposit insurance to include payment of compensation to specified consumers
of covered service providers;
2. Collect premia from covered service providers to cover the likely costs of resolution; and
3. Terminate insurance in specific circumstances.
For the purpose of calculating premia, the draft Code provides for:
1. the manner of classification of covered service providers into different categories;
2. the manner and methodology of assessment of premia payable by different categories of covered service
providers;
3. the process of collection of premia from covered service providers; and
4. the manner and mode of payment of premia by covered service providers to the Corporation.
The resolution corporation must be able to revise insurance limits, in accordance with the principle of proportionality
to the risk to viability of covered service providers.
The draft Code on resolution allows for persons or institutions who have been reimbursed from the resolution fund
to claim for compensation over and above what they have received. Alternately, persons or institutions who are
legitimate claimants, but whose claims have not been recognised by the resolution corporation, should also be able
to seek such compensation.
In exceptional circumstances, there may be an access to a line of credit from the Central Government for a temporary
period.
7.7. Fund for compensation and resolution
Since the scope of resolution runs beyond banks, the Code drafted by the Commission envisages
the creation of a resolution fund, to which various premia received from covered
service providers will be credited. The premia to be collected from the covered service
providers would be proportional to their financial position as envisaged in the prompt
corrective action framework.
In certain specified circumstances, the resolution corporation can terminate the policy
of insurance issued by the resolution corporation. For example, the resolution corporation
will be empowered to terminate the policy if the covered service provider fails
to pay the premia for a specified period, or if the covered service provider is engaged in
unsafe or unsound practices in conducting their business.
In the context of resolution, the Commission recommends the use of proceeds of the
resolution fund for resolution related expenses including administrative expenses as well
as for the payment of compensation to specified consumers. This reduces the burden on
covered service providers to make separate contributions for different purposes.
The Commission recognises the fact that the resolution corporation may require
monetary assistance if it is unable to meet its obligations in times of extreme financial
distress in the markets. In such exceptional circumstances, the resolution corporation
would be allowed to avail a line of credit from the Central Government for a specified
period. The Central Government will determine and review the terms of the line of credit.
Any extension, renewal or increase of credit under the line of credit sought by the resolution
corporation must be accompanied by a detailed report stating the reasons for
additional borrowing and its intended uses.
Table 7.7 summarises the recommendations of the Commission on insurance coverage
and the scheme of funding resolution that must be embedded in the draft Code on
resolution.
78 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION