Bank liquidation needs to be handled by insolvency professionals (IPs) under the supervision of the Reserve Bank of India (RBI) and the Deposit Insurance and Credit Guarantee Corporation (DICGC), according to an Insolvency and Bankruptcy Board of India (IBBI) study.
At present, IPs do not handle failed banks under the Insolvency and Bankruptcy Code (IBC), as banks are outside the Code’s corporate insolvency framework. Instead, bank failures are dealt with under banking laws with RBI, DICGC and the relevant registrar playing different roles. Liquidators are appointed under the existing bank liquidation framework.
The study has recommended bringing IBBI-certified IPs into bank liquidation. They would manage the failed bank’s remaining assets, while RBI and DICGC would retain oversight. The proposal would still not bring banks fully under the IBC, the study stated.
“One key recommendation is to integrate IPs into the bank liquidation framework. This would involve appointing IBBI-certified professionals to administer bank liquidations under the guidance of RBI/DICGC, without bringing banks fully under the IBC,” it said
The study added that such a move can be achieved through “regulatory changes or minor legislative amendments and would inject much-needed expertise and accountability into the system.”
Experts said the proposed role for IPs could help strengthen the liquidation process, provided they have expertise in the regulations governing the financial sector.
“While financial service providers are outside the purview of the IBC, where liquidation is envisaged, it would be prudent to appoint an insolvency professional with expertise in the regulations governing that sector,” said Devendra Mehta, fellow, INSOL International.
“Bringing insolvency professionals into the liquidation process could improve the recovery of bank loans and other assets after insured depositors have been paid,” said an insolvency expert.
Further, the study noted that more than 97% of depositors in failed banks now get their money from DICGC in a timely manner. As per rules, deposits are insured up to Rs 5 lakh per depositor.
But it has also identified the next stage as a problem. “However, the resolution of the failed bank’s remaining affairs – essentially, maximising recovery from the bank’s assets and minimising losses to the insurance fund and uninsured creditors – remains an Achilles’ heel,” the study said.
Once DICGC pays insured depositors, it becomes a creditor of the failed bank. It then has to recover the money from the bank’s remaining assets.
The study referred to the Punjab & Maharashtra Co-operative Bank (PMC Bank) crisis as one example. PMC Bank had assets of more than Rs 10,000 crore when it collapsed in 2019 after a major fraud came to light. It was later merged with Unity Small Finance Bank. DICGC paid Rs 3,791.6 crore towards PMC Bank’s insured deposits. Subsequently, DICGC carried the risk of recovering money from PMC Bank’s assets, including its loans and collateral.
Madhavpura Bank was also cited as an example, with the report noting that an IP serving as liquidator might have brought clearer timelines and asset-resolution strategies, potentially leading to better recoveries for DICGC and other creditors.
The IBBI report recommended fixed timelines for liquidation, including completing claims verification within 60 days and auctioning properties within six months. It also called for quarterly public reports, mandatory audits of liquidator accounts and a mechanism to replace underperforming liquidators.
The report recommended giving DICGC additional resolution powers, including helping transfer deposits of a weak bank to another bank in exchange for assets. A dedicated financial institution resolution authority was also suggested as a longer-term option.