The Reserve Bank of India (RBI) should swiftly come out with its revised directive on the resolution of stressed assets, given that the country direly needs the Insolvency and Bankruptcy Code (IBC) to restore the health of the financial system. The revised directive will replace RBI’s February 12, 2018, circular that was struck down by the Supreme Court. It had ruled that RBI does have the powers to direct banks to wield the IBC, but on a case-specific basis and with the authorisation of the Centre. However, prudential regulation must be left to RBI to preclude the recurrence of non-performing assets build-up.
The Supreme Court ruling notwithstanding, banks on their own volition can initiate bankruptcy proceedings. And to strengthen their spine on this count, RBI can direct them to increase their provisioning against bad loans, when they drag their feet. It makes sense for creditor banks to quickly seize defaulting companies, and work out a swift resolution, either by the sale of the company as a going concern, or, if it fails, the sale of assets following liquidation. But if banks fail to take action on their own within a reasonable period of time, RBI must have the powers to issue directions. The new government must amend the law to divest the discretionary power it now has to tell RBI which bad loans to send to IBC.
The IBC has led to a behavioural change in debtors who want to settle defaults to avoid losing their companies. This eagerness to service loans must not suffer, as it would, if IBC fails to bite. However, for bank CEOs to file for bankruptcy of defaulting borrowers, the need is to initiate wide-ranging reforms that include the appointment of senior managers, overhaul in their remuneration structure and the supervision of bank boards. Over to the next government.
Source- Economic Times.