The illusion of success

Why discretionary bank rescues are not asubstitute for the rule of law

- AARTHIKAM CHINTANAM KP KRISHNAN

‘The successful resolution of the Yes Bank crisis in 2020 has been hailed as a stellar example of astute crisis management by the Reserve Bank of India (RBI), with a rapid mobilisation of public and private capital led by the central bank. Indeed, the swift containment of contagion was an operational success, preventing what could have been a systemic shock.

However, to celebrate this episode as a model for future financial stability is to embrace a dangerous institutional mirage. The Yes Bank resolution was a victory of ad hoc expediency over systemic design. It violated all the well-known principles of good governance, rule of law, and financial regulation. It exposed the gaping, critical hole in India’s regulatory architecture: The continued absence of a non-discretionary, predictable framework for resolving failing financial institutions.

At the outset, it is sobering to note here that India is the only G20 country that is not in compliance with the “Key Attributes of Effective Resolution Regimes for Financial Institutions” issued by the Basel-based Financial Stability Board.

Let us understand the full picture.

One piece of Indian institutional capability on firm failure is gradually coming together: The Insolvency and Bankruptcy Code (IBC). It is inching towards its goals of:

(a) invocation when the borrower has a tiny default, with no forbearance;

(b) clarity on loss allocation with a clear waterfall;

(c) a commercially motivated committee of creditors (CoC) that decides between resolution vs. liquidation and;

(d) speed.