K C Chakrabarty, former deputy governor, RBI, talks to Anup Roy on issues in the new bankruptcy law and rules. Edited excerpts: The new ordinance gives scope for existing promoters to bid in a resolution process. Is that good or bad? Earlier, it was that existing promoters cannot bid. Now, the ordinance says the promoters can bid, if they meet certain conditions. Two things here — if someone is a defaulter, he cannot go for additional finance. So, how will he utilise the facility? He has to make the account a standard one, by paying out the overdue. This is a fair chance to the promoter. Why so? In many cases, when the customer is in difficulty, the bank does not give him any concession so long as the account is standard. You can’t take any haircut in a standard asset in our system. Now that you are taking a haircut in a market-related environment and the same people are bidding, the promoter would say, had this concession been given to me earlier, I would have continued the account as standard. I am now making my account standard, so that I can be eligible for that discount. To that extent, it is fair. How does the bank benefit in this? Banks enter into restructuring to make the accounts standard. The amendments are good for the banker because he is getting some money and the promoter is also bidding for the same discount like anybody else. Over a period, a culture will develop where the bankers will be helping the borrowers who are good. When you feel the existing interest burden is too high for the promoter to bear, you give him some discount. However, it should be highlighted that for lower and middle-level borrowers, the bank does not want to give any discount. In fact, banks want to sell the standard asset in premia; only NPAs (non-performing assets) they sell at a discount. The ordinance bars wilful defaulters. I have a reservation with that phrase.
Worldwide, there is no definition of this term. There is a lack of transparency… if I don’t want to give an opportunity, I will declare a borrower in NPA as a wilful defaulter. We must have a transparent system of defining what is a wilful default. Even fraud is not defined properly in our system. These need to be defined in a very transparent manner.The government now gives power to the credit committee to reject a resolution plan. Definitely, banks will have to support a resolution plan for it to take effect. Whoever is giving an advance should be satisfied that the account would now be viable; otherwise, you are again bidding for time. In that case, better go for selling off the assets. Do you think the 180 days of resolution period won’t be adhered to if plans are rejected? There has to be a timeline. Creditors are also stuck; they are also interested in resolution. The system cannot work if everybody doesn’t have a vested interest in resolution. The IBC (law) now prohibits sale of assets to a defaulter. Naturally, if you are not eligible for a discount, you are not eligible for purchasing the assets sold at a discount. Will it prevent cases like Synergies-Dooray, where we saw a haircut of 95 per cent? Taking a haircut of 95 per cent is not a problem, provided the banks agreed to that. Had the banks agreed for this, this would not have gone to the resolution process itself. The problem is that in many cases, banks just do not agree on a reasonable haircut, so long as the account is good. Your final thoughts on the amended bankruptcy code? A defaulter cannot bid but once he makes the account standard, he can bid for the discount. I think that is fair. Whatever the ordinance has done is fair, except that we have to transparently define what is fraud and what is wilful default. We cannot leave these important things only to the banks; they must have outside scrutiny. We must also take effective steps so that new NPAs are not formed; so far, you are only resolving the existing problem. You need to also prevent new problems from arising.