Govt wanted to dilute bankruptcy law: Urjit Patel on what led to the rift

Patel recalls the events surrounding his resignation in a book released on Friday

Former Reserve Bank of India Governor Urjit Patel has revealed that moves directed towards diluting bankruptcy law led to disagreements between the Union government and the central bank, according to a report by Bloomberg.

In a book released Friday, Patel — who headed the RBI between September 2016 and his unexpected resignation in December 2018 — said the government seemed to lose interest in the law in during the year when he resigned.

A circular issued by the RBI in February 2018, forcing banks to immediately classify borrowers as defaulters when they delayed repayments, led to the rift. The circular also barred defaulting company founders from trying to buy back their firms during insolvency auctions.

“Instead of buttressing and future-proofing the gains thus far, an atmosphere to go easy on the pedal ensued,” Patel wrote.

“Until then, for the most part, the finance minister and I were on the same page, with frequent conversations on enhancing the landmark legislation’s operational efficiency.” he added.

The center probably held the view that “deterrence effect — ‘future defaulters beware, you may lose your business’” had been achieved, Patel said.

He further revealed, “there were requests for rolling back the February circular” and “a canard was spread” to discredit the guidelines, including an 'incorrect' argument that small businesses would suffer greatly.

His revelations offer a first glimpse into a tussle between the central bank and the government, which led eventually to a U-turn that stunned India Inc when the apex court last year struck down the Reserve Banks’s February circular. These changes in the bankruptcy legislation risk eroding gains from the efforts to clean what is one of the world’s largest bad-loan piles, Patel cautions in his book.