Pro­tect­ing in­sol­vency process

Reg­u­la­tory for­bear­ance should be viewed with cau­tion

Business Standard - - OPINION -

In Fe­bru­ary, the Re­serve Bank of In­dia (RBI), which serves as the bank­ing reg­u­la­tor and is thus over­see­ing the bank as­set clean-up process, had an­nounced strin­gent norms for banks to fol­low re­gard­ing the treat­ment of bad loans. In the cur­rent sys­tem, a sin­gle day’s de­lay in re­pay­ment will re­quire the bank to recog­nise the bor­rower as hav­ing de­faulted. This served an im­por­tant pur­pose. For too long, banks had cho­sen to ig­nore bad loans, and had sought other meth­ods, such as “re­struc­tur­ing” schemes, in or­der to avoid tak­ing ac­tion or mak­ing proper pro­vi­sions. Many banks have clearly mis­used the ear­lier rules for re­struc­tur­ing of loans; for ex­am­ple, only one of the 20 ac­counts for which banks in­voked the SDR (strate­gic debt re­struc­tur­ing) schemes has been re­solved. A zero-tol­er­ance mech­a­nism is con­sid­ered nec­es­sary in or­der to force a clean-up. It is now be­ing re­ported, how­ever, that the fi­nance min­istry is urg­ing the RBI to mod­er­ate these re­quire­ments. It has been sug­gested that the time limit for recog­nis­ing de­fault should be ex­tended from a sin­gle day to 30 days. The fi­nance min­istry’s case is re­port­edly that the bur­den of re­pay­ment on small and medium en­ter­prises is too heavy, and that com­pa­nies will be forced to close, re­sult­ing in job losses.

The RBI should be care­ful about di­lut­ing its ex­ist­ing re­quire­ments. If a sin­gle day time limit is be­ing seen as too strin­gent, the rea­son as to why these re­pay­ments are not com­ing in on time should be care­fully in­ves­ti­gated. The fi­nance min­istry’s ar­gu­ment re­gard­ing job losses is not en­tirely per­sua­sive. The new bankruptcy process has been de­signed, and is con­stantly be­ing tweaked, to en­sure that there is the high­est pos­si­ble chance that as­sets re­main op­er­a­tional, and thus that job losses are min­imised. The in­sol­vency and bankruptcy code is the fit and proper mech­a­nism for the re­vival of stressed as­sets — but they have to be recog­nised as prob­lem­atic. Any in­crease in the time limit for such recog­ni­tion should only be an­nounced by the RBI fol­low­ing a proper in­ves­ti­ga­tion as to the pro­por­tion of pay­ments that are de­layed by more than a sin­gle day for rea­sons un­re­lated to the sol­vency of the bor­rower. It should ig­nore any ex­ter­nal pres­sure for ad­di­tional reg­u­la­tory for­bear­ance. In any case, the bankruptcy pro­ce­dure pro­vides mul­ti­ple av­enues for ex­ist­ing own­ers or pro­mot­ers to en­sure that, if they have the money re­quired to clear their debts, they keep their en­ter­prises op­er­a­tional and stay in con­trol. The RBI has kicked off a vi­tally im­por­tant process, and for the sake of the larger econ­omy, it should be al­lowed to con­tinue un­ham­pered.

One other sug­ges­tion from the fi­nance min­istry, how­ever, is worth con­sid­er­ing — re­gard­ing the weak­en­ing of the re­quire­ment that a res­o­lu­tion plan for a stressed as­set be ap­proved by all cred­i­tors. It has been pro­posed that the thresh­old for agree­ment be re­duced to 75 per cent. This is a rea­son­able sug­ges­tion, which might speed up the res­o­lu­tion process and make it more ef­fi­cient. The RBI should take the sug­ges­tion on board while mov­ing for­ward. Over­all, how­ever, self-serv­ing sug­ges­tions from banks, pro­mot­ers, or the gov­ern­ment seek­ing to de­lay or di­lute the as­set clean-up ef­fort should be con­sid­ered only with great care. The RBI must pro­tect its reg­u­la­tory in­de­pen­dence.

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