SBI says bankruptcy code can't solve all problems for banks

State Bank of India (SBI) today raised questions over the bankruptcy code being readied by the government, citing past experiences, while stressing on the need for a change in the overall 'ecosystem' to tide over the problem of bad loans.
"We place a lot of faith in the bankruptcy code and expect it to resolve all our problems. But going by the past experience, aren't we placing too much faith in the bankruptcy code without clearing up the entire ecosystem?" SBI MD (compliance and risk), Rajnish Kumar said.
"If we had such an ecosystem, earlier attempts to tackle the menace of bad loans like debt recovery tribunals (DRTs) would have been successful," Kumar added, without elaborating on what constitutes the ecosystem.

He, however, hinted at the willingness of a borrower to repay debt, saying, "people would not be able to take shelter under the law and prevent action under the Sarfesi Act" when it comes to repayments.
It may be recalled that following demand from stakeholders, including RBI, the government has announced that it is working on a bankruptcy code, similar to the one in the US.
"The bankruptcy code was to be ready by the end of July, and I think it's going to be ready any of these days," Finance Minister Arun Jaitley had said on August 18.

Seeking to dismiss the perception of state-owned banks not doing their job when it comes to tackling non-performing assets (NPAs), Kumar spoke of earlier attempts in this regard, including setting up of DRTs and enacting the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfesi) Act, 2002.

"There was a lot of hope. The Sarfesi Act did help a little bit in NPA resolution, but DRTs as of now are not successful. And Rs 2 lakh crore is stuck with DRTs," he said.
Kumar added that even if lenders are able to recover half of the amount stuck in DRTs, it would bring down the requirement of capital for banks and increase valuations as investors would lap up the stocks.