RBI working on enabling mechanism for exit by entrepreneurs in absence of bankruptcy laws, says Executive Director, RBI

The Reserve Bank of India (RBI) has started work on enabling banks to provide an honourable exit to unsuccessful entrepreneurs from "unattractive" businesses in the absence of a good bankruptcy legal system, RBI Executive Director Mr. B Mahapatra said at an ASSOCHAM event.

"We have been thinking how to create a regulatory structure (as) we do not have a good bankruptcy system. We are thinking about a structure so that people should voluntary withdraw from unattractive businesses," said Mr Mahapatra while addressing the ASSOCHAM National Seminar on 'Managing Stressed Assets'.

He said in the Indian context the bankruptcy has a stigma attached. "Nobody wants to be called a bankrupt person... Indian philosophy is that we do not like failures".

He said the work on providing an enable framework for "voluntary withdrawal" by entrepreneurs has just begun and is only at the stage of conceptualization. While 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 the heavy NPAs, Mr 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 Reserve Bank of India has now provided a system of incentives and disincentives for following rules of the game for Corporate Debt Restructuring (CDRs).

It has been done since the entire process of CDRs was being seen with suspicion, added Mr. Mahapatra.

He said the only consolation about the NPAs is that the bad asset is now largely concentrated in the infrastructure sector where the assets still exist and there is no siphoning off. While the questions can be raised about the parameters like debt -equity ratio etc...but the assets are there embedded in the earth. "Road is there, power plant is there, it may not have become operational for various reasons", he said.

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.

Other experts, including Chairman and Managing Director Mr M Narendra, SMC Group Chairman and Managing Director Mr S C Aggarwal , expressed concern over huge NPAs - as much as Rs 2.50 lakh crore.

ASSOCHAM past President and Member of Parliament Mr R N Dhoot said things are improving and expressed hope that the level of NPAs will come down in a couple of years.

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