a sub - committee under the chairmanship of governor of the reserve bank acts as the operational arm of the fsdc. it provides a mechanism for coordination among regulators, and between regulators and the government which, as we realized during this crisis, is critically important, especially during stressed times. 13. failures of commercial banks in india have been rare. the last time we had a major commercial bank coming under distress was in 2004 and that was resolved by effectively and quickly merging it with another strong public sector bank. failures among urban co - operative banks are, however, quite common. for banks that fail to meet the minimum prescribed requirements, we institute a regular monitoring mechanism. the weak bank is required to put in place a plan of action indicating targets for critical financial parameters including capital infusion. if weakness in the bank persists with net worth turning negative and there is no credible action plan for a turnaround, it is put under a moratorium. the purpose of imposing a moratorium is to prevent a run on the bank, stop asset stripping and give time to the regulators to identify a suitable strong bank for takeover. the process of merger is put through as expeditiously as possible in a transparent and consultative manner. importantly, in the reserve bank, we have a committee of the board, the board for financial supervision, which reviews our bank supervisory function and monitors the performance of banks, especially weak banks. 14. the typical resolution methods that we have used in india are assisting the troubled bank in restructuring, or merging it with a strong institution, or closure. the most common method has been assisted or compulsory merger when the weak bank is merged with another bank, usually a public sector bank. there were also cases of voluntary merger where a healthy bank voluntarily took over a weak bank. apart from making payouts to banks that are put under liquidation, dicgc assists in mergers by meeting the shortfalls in depositors ’ claims up to the coverage limit when the acquiring bank is unable to meet this liability. in case of smaller urban cooperative banks, the general approach has been to liquidate the bank with reimbursement made to depositors. bank resolution framework and deposit insurance 15. the financial crisis has underscored the importance of rapid resolution to arrest contagion and restore stability. we need a resolution process where banks can be wound down in an orderly fashion, removing the unsafe or unsound elements but preserving the vital financial activities. international financial standard setting bodies like the financial stability

received by dicgc while the entire amount of payout was to co - operative banks, which account for only 14 per cent of the deposits insured by dicgc. 26. this cross - subsidization, or charging premium at a uniform rate from all categories of banks, obviously raises a moral hazard. one option for reducing cross - subsidy is to charge a risk - based premium, but we are not sanguine that this is necessarily optimal in india. there needs to be a clearer assessment of the tradeoff between minimizing the moral hazard and placing the additional burden of a higher premium on banks that are already weak and yet serve the very important objective of financial inclusion. another concern is that imposition of risk based premiums could have a market impact, with stock prices of already weak banks negatively affected by the burden of higher premiums. on the other hand, crosssubsidization can, in fact, be justified by viewing higher premiums on larger banks as a surcharge for their larger externalities on the rest of the system. i hope some of these crosssubsidization and moral hazard issues will figure in the deliberations of this conference. iv. adequacy of deposit insurance fund 27. the fourth challenge i want to raise relates to estimating the adequacy of the deposit insurance fund. public confidence in deposit insurance will be determined largely by whether the public believes that the deposit fund is large enough to meet its commitments. dicgc maintains an ex - ante fund that is funded by the premium collected from insured banks and income generated from investment of funds. for maintaining depositor confidence, the fund is required to be robust enough to meet claims arising out of routine failure of banks under normal situations. going by the past record of failures, the fund maintained by dicgc appears adequate. but it is not clear that the fund will be able to meet claims arising from the putative failure of a couple of small or medium size commercial bis central bankers ’ speeches banks. admittedly, no deposit insurer can maintain enough liquid funds to face a widespread financial crisis. in an extraordinary situation of systemic failure of banks, it is imperative that the deposit insurer is armed with unlimited and quick access to funds from the central bank and / or the government so that financial stability is not jeopardized. as we all know, it was arrangements such as this that played a crucial role in containing panic among depositors