“Remediation” and “sanatorium” are words that cause fright on the faces of many investors, especially in the era of the global financial crisis. In the literal translation, “sanitation” is interpreted as recovery. If a definition is imposed on the banking sector, then it can be interpreted as the recovery of a financial institution. A sanatorium is a person or company that is responsible for restoring the functionality of a banking institution. Rehabilitation of a financial institution is not always carried out, but only when it is possible to avoid bankruptcy, or when a commercial financial institution is classified as significant for a particular region. The procedure is ineffective if the drawdown on the balance in the bank corresponds to its balance. The effectiveness of the recovery procedure is determined by the Central Bank Commission.
The essence of the rehabilitation procedure
The essence of the reorganization is to restore the bank’s effective operability and not resort to revoking the Central Bank’s license. The Banking Law states that if difficulties arise in the work of a bank, one of the chairmen must report the difficulties to the shareholders. The shareholders are already making a decision either regarding the increase in the capital of the credit institution on their own, or on the announcement of financial incapacity with a parallel request for reorganization. According to the general director of the Deposit Insurance Agency Isaev, he rarely had to deal with such actions of banks. In most situations, the problems associated with the liquidity of a financial institution are carefully hidden.
What do the sanatoriums do?
As already mentioned, a sanatorium is a person or company that is responsible for restoring a bank that has encountered difficulties. At the same time, the interests of investors are defended. Ideally, after the rehabilitation of the enterprise, each investor should receive a deposit back. Not only the sanatorium bank, but also the Central Bank and the DIA (Deposit Insurance Agency) usually work on the procedure. By reorganization, deficiencies in work are determined, and persons guilty of bank problems are removed from the leadership. Complex financing of the institution is carried out so that it can cover all its obligations. Certain benefits from reorganization are received by the sanatoriums themselves. We can talk about providing a loan to the Central Bank at an incredibly low percentage.
Tasks of sanatoriums and DIA
The rehabilitation process in Russia is carried out by the DIA. The sanatorium bank may take part in the procedure. This is a financial institution (it is much larger than an institution on the verge of bankruptcy), which is ready to take on part of the material obligations of the latter. Alternatively, raising the level of liquidity can be carried out at the expense of attracted funds of investors. When the responsibility for the financial situation of a bank on the verge of bankruptcy falls on the shoulders of a financial institution-sanatorium, the DIA takes on the responsibility of forming a new managerial apparatus. After completing this task, all liability is withdrawn from the Deposit Insurance Agency. Financial rehabilitation cannot last more than 18 months. It can be extended for half a year only if this decision is made by the arbitration court. The Central Bank determines whether or not reorganization will take place in this particular case. It is not difficult to figure out what investors should do during the bank recovery period, since this process does not affect the services of a financial institution and partnership.
What are the procedures for recovering liquidity?
In accordance with the legislation, reorganization is a set of measures that should raise the bank's liquidity level, thereby saving it from bankruptcy in order to preserve the license. A bank sanator is an entity that improves the financial and economic situation of a debtor. At the same time, all claims of creditors are satisfied by lending, restructuring the enterprise with debts and capital inclusive. It is allowed to change the organizational, legal and production structures of the debtor. The statistics say that in the long run bankruptcies turn out to be much more. Considering the question of what sanitation means for a sanatorium, it is worth saying that this process is financially very expensive and requires a lot of time and effort.
What is included in the concept of rehabilitation?
Remediation is a very extensive procedure, during which tasks of a very different type are realized. We can talk about reprofiling activities and closing down unprofitable programs. A deferral is being drawn up or a new installment contract is concluded regarding the repayment of debts. Partial write-off of debts may occur, which is provided for by a settlement. The receivables are necessarily liquidated and assets are restructured. Partial sale of property is common. In case of raising funds, the investor assumes responsibility for paying part of the debt. He undertakes the solution of tasks in terms of fulfilling financial obligations. During the restructuring of the bank, staff who do not directly participate in the reorganization process may fall under the reduction.
Why does the government support banks?
Reorganization and bankruptcy are not just incompatible, but also opposite phenomena. If bankruptcy is the complete closure of a financial institution, which can afford all investors and customers, then reorganization is the restoration of the enterprise. The external format of the financial institution does not change. The Russian government, including the Central Bank, has its own interests in matters of reorganization. Helping small market participants, it increases confidence in the domestic banking system. If a bank that finds itself in difficult circumstances is very significant for the region, then its bankruptcy can hit entrepreneurs, and therefore the regional economy. At the moment, the procedure in Russia is carried out by only a few large financial institutions that do not particularly seek to play the role of missionaries in connection with significant financial costs.
Main difficulties
The bank's sanator is a larger bank with high liquidity ratios, which bails a troubled organization. Problems in restoring performance are mainly associated with incorrect actions on the part of bank managers. They either relate to illegal activities, or they have property of dubious origin on their account. Making assets liquid is not always possible. Moreover, as practice shows, the loan issued is not always enough to rehabilitate a financial institution.
