RBI working on an exit route for businesses facing bankruptcy

The Reserve Bank of India is working on norms to enable entrepreneurs exit insolvent businesses. India does not have a good bankruptcy code like Chapter 11 in the US.

According to RBI Executive Director B Mahapatra, “We have been thinking about how to create a regulatory structure (as) we do not have a good bankruptcy system. We are thinking about a structure so that people can voluntarily withdraw from unattractive businesses.”

He was speaking at the National Seminar on ‘Managing Stressed Assets’ organised by Assocham here. Mahapatra said in the Indian context bankruptcy has a stigma attached to it.

“Nobody wants to be called a bankrupt person... Indian philosophy is that we do not like failures,” he said, adding that the work on providing an enabling framework for “voluntary withdrawal” by entrepreneurs has just begun and is only at the stage of conceptualisation. There is a talk of providing legal provision in the Companies Act. But the RBI would like to work on examining the regulatory framework for the “voluntary withdrawal” by the entrepreneurs.

Referring to the problem of non-performing assets, Mahapatra said the concentration of the bad assets is mostly in the public sector banks, while the new private sector banks have shown much better performance.

He said the RBI has now provided a system of incentives and disincentives for following the rules of the game for Corporate Debt Restructuring (CDR). It has been done since the entire process of CDR was being seen with suspicion.

“Only consolation about the NPAs is that the bad asset is now largely concentrated in the infrastructure sector (roads, power) where the assets still exist and there is no siphoning off,” he added.

On its part, the RBI has established a Credit Central Repository of Information on the large banks. It ensures that if a large borrower defaults with one bank, the information about the same is passed on to the other banks on quarterly basis.

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