Having overhauled the century-old bankruptcy laws for companies, the government will now bring a new insolvency law for banks and financial institutions to vest with depositors the first right over assets of a defunct entity.
Minister for State for Finance Jayant Sinha said the new legislation that is in the process of being drafted will help in quick winding up of stressed banks, non-banking financial companies (NBFCs) and microfinance institutions while safeguarding the interest of small savers.
“We are also looking at additional legislation for resolution of bankruptcy in financial firms,” he said.
Last month, Parliament passed the Insolvency and Bankruptcy Code that unifies more than four overlapping sets of laws and aims to slash time taken to wind up a dying company or recover dues from a defaulter.
The inability to shut loss-making firms and collect dues had locked up funds at banks and damped lending and investment. The government is setting up infrastructure to operationalise the law, he said.
Financial firms, Sinha said, “By their characteristics, have depositors of money as well. So we have to come up with appropriate resolution processes for orderly winding down of financial firms. It will be a new law.”
“We are working on that as well. So this is more in terms of the structural reforms we are doing which is to look at the resolution and insolvency process,” he added.
The new law will deal with financial institutions, including banks, NBFCs, and other financial institutions, that have money deposited, he said.
Asked whether the depositors would have first charge on liquidation, he said, “Let’s wait for that legislation to be drafted, but obviously yes depositor money is first in line. We are working on that.”
Sinha said the government is also planning to come out with comprehensive law – Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Provisions (Amendment) Bill, 2016 – to amend the debt recovery laws with an overall objective of improving the ease of doing business.
“We are making amendments to the DRT and Sarfaesi Act,” he said.
The Bill, which was introduced in the Lok Sabha last month, seeks to amend four legislation — Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1899 and the Depositories Act, 1996.