Banking Reform and Comparative Perspectives: Complete Notes

The study of banking law ends where the statute book runs out: at the reforms proposed, announced, half built or abandoned, and at the foreign systems against which India's choices are measured. These are the favourite grounds of the essay paper and the interview board, because they test not recall but judgment: what the FSLRC was for, why the FRDI Bill died, what the bad bank can and cannot do, why privatisation remains an announcement, and what twin peaks, ring fences and the FDIC teach a system that adopted none of them.

Figure 1: The five arguments of these notes

1. The FSLRC and the Indian Financial Code

• The Financial Sector Legislative Reforms Commission (2011 to 2013, Justice B. N. Srikrishna) answered a clean-page question with a complete draft Indian Financial Code: principles in the statute, detail in regulation made through draft, cost-benefit analysis, comment and reasons, every order appealable.
• Its seven agency architecture: the Reserve Bank (monetary policy, banking, payments); a Unified Financial Agency for all non-banking finance; a Financial Sector Appellate Tribunal over every regulator; a Resolution Corporation; a Financial Redress Agency; a Public Debt Management Agency; and a statutory Financial Stability and Development Council.
• Three principles: ownership neutral regulation, consumer protection as the purpose, and non-sectoral design.
• Enacted: the inflation target (2015) and the monetary policy committee (Finance Act, 2016); the commodities regulator's merger into the securities regulator (2015). Shelved: the unified agency, the debt agency (announced and rolled back in 2015), appeal against the Reserve Bank. The resolution chapter became the FRDI Bill.

2. The resolution gap

• Ordinary insolvency law cannot resolve a bank: runs outpace courts, depositors cannot sit as a creditors' committee, and failure is contagious. The FSB Key Attributes (2011) ask for a resolution authority with powers of transfer, bridge institution, bail in and stay, exercisable over a weekend.
• The FRDI Bill (August 2017) would have built a Resolution Corporation with a risk-to-viability ladder and those tools; the bail in clause, read against a deposit insurance limit unchanged at ₹1 lakh since 1993, raised a panic the Government ended by withdrawing the Bill in August 2018. The cover's rise to ₹5 lakh (February 2020) followed, months after the PMC failure.
• Practice since: Yes Bank reconstructed (March 2020, State Bank led capital, additional tier one bonds written off); Lakshmi Vilas Bank compulsorily amalgamated into DBS Bank India (November 2020) under section 45; PMC Bank frozen under directions and taken over by Unity Small Finance Bank (2022); DHFL, then Srei and Reliance Capital, resolved through the insolvency code's Financial Service Providers Rules (November 2019).
• The gap, precisely: no resolution authority, no pre-announced creditor hierarchy for rescue, no cross-sector coverage, and discretion where the standard asks for order. No resolution law has been enacted.

Figure 2: Fifteen years of the reform arc

3. The bad bank

• NARCL (incorporated July 2021) is an asset reconstruction company under the Securitisation Act, majority owned by public sector banks; IDRCL, majority private, resolves what it buys. No new statute was needed.
• Acquisition price is paid 15 per cent in cash, 85 per cent in security receipts held by the selling banks, and the receipts carry a Central Government guarantee of ₹30,600 crore (September 2021, five years, fee rising with time) paying the shortfall on resolution.
• The universe: legacy accounts of ₹500 crore and above, about ₹2 lakh crore identified; by March 2026 NARCL had acquired 33 accounts with about ₹1.66 lakh crore of debt and recovered about ₹6,345 crore from 23 of them.
• The debate: aggregation breaks the consent deadlock of consortium lending and releases capital from fully provisioned books, against the objection that banks selling to a vehicle they own, for paper they hold, have moved the loss around the system under a contingent fiscal guarantee.

4. The privatisation debate

• The statutory wall: section 3(2B) of the Acts of 1970 and 1980 keeps the Centre at 51 per cent of every nationalised bank, the same floor the State Bank Act has carried since 2010, so privatisation needs Parliament before it needs a buyer.
• Narasimham (1991) urged dilution; Nayak (2014) urged repeal of the Acts, a Bank Investment Company and stakes below control; the Budget of 2021 announced privatisation of two public sector banks, but the enabling Bill has never been introduced, and the 2025 banking amendments dealt with nominations, substantial interest and audit, not ownership.
• IDBI Bank is the running template because it is a company outside those Acts: LIC's majority (January 2019) made it a private sector bank by reclassification, and the sale of 60.72 per cent by the Government and LIC together, with Fairfax and Emirates NBD the reported finalists and revised bids under evaluation in late 2026, rehearses every step, valuation, fit and proper, clearances, that the larger programme would need.
• What happened instead of sale: consolidation to twelve public sector banks, recapitalisation above ₹3 lakh crore, and the EASE governance agenda.

Figure 3: Proposal against position, across the reform debate

5. The comparative ground

• Architectures: sectoral (India; the United States, multiplied by its dual banking system), unified (Britain's old FSA, BaFin, Japan), twin peaks by objective (Australia 1998; Britain since 2013), and central bank led (India, the euro area's banking union).
• Structural separation: Glass-Steagall (1933) divided commercial from investment banking; repeal (1999) preceded the universal giants of 2008; the Volcker rule (2010) bans proprietary trading instead; Britain's ring fence (in force 2019) walls retail deposits inside a separately capitalised subsidiary. India fences owners and activities (sections 6 and 19, no industrial houses) rather than trading books.
• Resolution abroad: the FDIC closes a bank on Friday and reopens it Monday by purchase and assumption at least cost; Europe's 2014 directive makes bail in precede public money; Credit Suisse (2023) showed the doctrine live. These regimes are the measure of India's gap.
• Deposit insurance compared: $250,000 (United States), £120,000 from 1 December 2025 (Britain, seven day target), €100,000 (European Union), ₹5 lakh (India, 2020, 90 day interim payment under the 2021 amendment); the FDIC prices premiums by risk and resolves what it insures, India moved to risk-based premiums from 1 April 2026, and the DICGC remains a paybox plus beside, not inside, the resolution machinery; the IADI Core Principles, revised in November 2025, are the common benchmark.

Figure 4: What these notes teach, layer by layer

6. Quick Revision

1. Every proposal in these notes already exists somewhere as working law; the debates are about transplantation, not invention.
2. The FRDI's failure was sequencing: bail in legislated before credible deposit cover.
3. The bad bank is a scheme built to end; the resolution regime is the institution still unbuilt.
4. Privatisation is a statute away for the nationalised banks and a signature away for IDBI.
5. India's model, stated in one line: central bank led, universal banking, paybox plus insurance, resolution pending.

7. Frequently Asked Questions

How should an answer connect the FSLRC, the FRDI Bill and the resolution gap?

As one argument in three acts. The FSLRC diagnosed the absence of any regime for failing financial firms and drafted the cure, a Resolution Corporation, into the Indian Financial Code. The FRDI Bill of 2017 lifted that chapter into a stand-alone statute, and its withdrawal in 2018 was the moment the diagnosis was accepted and the cure refused: the bail-in clause was politically impossible beside a ₹1 lakh insurance limit. Everything since, the fivefold rise in cover, the 90 day payment amendment, the improvised rescues of 2020 to 2022, is the system managing the gap without closing it. A complete answer names the standard (the FSB Key Attributes), the attempt (FRDI), the reason it failed (sequencing of bail in and insurance), and the present state (section 45 plus the 2019 rules, with no resolution law enacted).

Is the bad bank a substitute for a resolution regime?

No, and confusing them is a classic error. The bad bank works on the stock: loans that failed years ago, fully provisioned, where the problem is coordination among creditors and the cure is aggregation in one owner. A resolution regime works on the flow and on the institution: a bank failing now, where the problem is speed and the cure is a pre-announced order of loss executed before the run completes. NARCL cannot save a failing bank, and a Resolution Corporation would not have been needed to buy Jaypee's old debt. A system needs both, and India, as these notes show, built the one that required no new statute.

What single comparative point is most worth making in an exam?

That abroad the deposit insurer usually sits inside the failure machinery, and in India beside it. The FDIC insures, examines, prices risk and resolves, so the agency that pays for failure also controls how failure happens, and a bank closes on Friday and opens on Monday. The DICGC insures and reimburses, but moratorium, merger and reconstruction belong to the Reserve Bank and the Government, so the insurer pays for decisions it does not make, and the depositor waits on a process built for negotiation rather than speed. Almost every reform proposal in these notes, the FSLRC's Resolution Corporation absorbing deposit insurance, the FRDI Bill's design, the risk-based premiums adopted in 2026, is an attempt to narrow that one structural distance.

8. Related Topics and Provisions

• Committee landmarks: Narasimham to Nayak
• Deposit insurance and the DICGC
• Moratorium, reconstruction and amalgamation of banking companies
• Public sector banks: nationalisation and after
• Capital adequacy and the Basel framework in Indian banking
• The Securitisation Act and asset reconstruction companies