Evaluate the role of resolution mechanisms and safety nets in keeping the financial system stable, with reference to India's institutional framework.

RBI Governor Sanjay Malhotra counts credible safety nets and effective resolution mechanisms among the pillars of a system that can withstand unforeseen shocks [1]. India's safety nets are fairly strong, but its resolution framework is still incomplete.

Strengths of the existing framework

• Deposit insurance: DICGC cover was raised from ₹1 lakh to ₹5 lakh per depositor from 4 February 2020 [2]. This fully protects most small savers and so reduces the risk of bank runs.
• Time-bound payout: The DICGC (Amendment) Act, 2021 requires interim payment within 90 days once a bank's depositors are restricted [3]. Savers no longer wait years for their money.
• Supervisory resolution: Under Section 45, Banking Regulation Act, 1949, the RBI placed Yes Bank under moratorium and framed a reconstruction scheme with SBI's investment in 2020 [4]. Services continued and contagion was contained.
• NBFC resolution: Section 227 of the IBC, 2016 allows the RBI to take large NBFCs to insolvency. DHFL was admitted on the RBI's application in 2019 [5].

Limitations

• No dedicated resolution law: The FRDI Bill, 2017, which proposed a Resolution Corporation, was withdrawn after public fears over its bail-in clause [6]. Bank failures are therefore handled case by case, often with public-sector banks or public money, which encourages moral hazard.
• Trust is fragile: The bail-in episode showed that a safety net works only if savers understand and trust it. A poorly explained design can itself trigger panic.
• Shifting risk: NBFCs and market finance have grown, making the system more interconnected [7]. Yet NBFCs have no deposit insurance or assured lender-of-last-resort support, and IBC timelines are slow for fast-moving financial failures.
• Uneven buffers: The IMF notes that some public sector banks may need more capital to keep lending under severe stress [7]. This raises the stakes if resolution is weak.

Verdict: The safety nets have largely protected depositor confidence. The resolution side still depends on improvised, case-by-case action.

Overall, deposit insurance and the RBI's powers give India a working first line of defence, but resolution lacks a legal backbone. The way forward is a redesigned resolution law that clearly protects insured deposits and puts losses on large creditors. Resolution tools should also cover systemic NBFCs, with coordination through the FSDC. Together these would strengthen domestic financial institutions (SDG 8.10) and make stability last.