Resolution authority on cards to deal with financial distress: RBI

The Reserve Bank on Thursday said that a proposal is afoot to set up a resolution authority to deal with the widespread distress caused by failure of financial institutions.

“...within India we are coming up with a resolution authority for what can be done when institutions come under stress,” RBI Governor D Subbarao said in response to a query as to whether it was right to impose ‘sin tax’ to bailout distressed investors of Saradha Group in West Bengal.

Resolution authority provides an official framework to deal with the problems in the aftermath of the failure of large financial institutions.

The Kolkata-based Saradha Group has cheated investors of crores of rupees through fraudulent money pooling scheme.

West Bengal government’s proposal to impose ‘sin tax’ on cigarettes to bail out investors, he said, “is entirely a political decision and is left to the state government and its something that government’s do all the time”.

Citing examples of developed nations, he said, it was done in US when the government used tax payer money to bailout many financial institutions which came under stress due to global meltdown in 2008.

The Reserve Bank, he said, would soon issue a public advisory to spread awareness among people about unscrupulous scheme operators.

“RBI as a public policy institution is responsible for spreading awareness about what are the legal schemes and what is illegal, who is the responsible for regulating these schemes, how can ordinary people know what is legal and what is illegal and how can they protect themselves against frauds,” he added.

Stating that alleged financial fraud by Saradha Group recently should not be termed as chit-fund scam, he said, “what has been blown up by media in the last few days some are collective investment schemes which are registered with SEBI.

There are irregularities and SEBI is taking action”.

Noting that non-banking sector is very large and diverse segment, Mr Subbarao said the sector is regulated by different entities.

“There are several types of institutions and schemes, operations in the non-bank sector. Different regulatory agencies are responsible for regulating such schemes in particular,” he said.

The NBFCs which are taking deposits and are registered with the RBI are to be regulated by the Reserve Bank, he said, adding in case they are not registered with the central bank they would come within the purview of the Ministry of Corporate Affairs.