Banks still have the leeway to use the Insolvency and Bankruptcy Code (IBC) to resolve bad loans, even after the Supreme Court’s quashing of the Reserve Bank of India’s (RBI) February 12 circular. What has changed is who decides to initiate bankruptcy. The decision has shifted from RBI, unless specifically directed by the government, to the creditor bank.
This is not so bad. The country needs swift creditor seizure of defaulting companies followed by quick resolution, either by sale of the company as a going concern or, if that fails, sale of the assets following liquidation. Already, the so-called inter-creditor agreement (ICA) gives banks the flexibility to resolve stressed assets either through the IBC or otherwise. But ensuring that the ICA works calls for protection of bankers from criminalisation of motives.
The SC ruling also puts the spotlight on the flaws in Section 35AA of the Banking Regulation Act. As things stand, the Centre to has to authorise the RBI to issue directions in respect of individual defaults.
It means without the government’s authorisation, RBI would have no power to issue directions. That is absurd. A key regulatory power of the banking regulator thus stands transferred to the government. Prudential regulation must be left to RBI, which must have the power to issue directions to banks to initiate bankruptcy proceedings, if banks do not take such action on their own within a reasonable time period.
The government that assumes office at the Centre must amend the Banking Regulation Act to remove the requirement of specific authorisation for RBI to direct banks to move for resolution in the case of individual defaults. But for bank CEOs to not be tempted to leave filing for bankruptcy to their successors, wide-ranging reform is called for in areas ranging from appointment of senior managers and structuring their remuneration to the functioning of bank boards and their supervision.
The charge that a single day’s delay triggering default is too stringent is misplaced. That can apply to any deadline, including for any grace period, one day or one year.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
via Banks Still Can Trigger Bankruptcy