Acting In Haste

The Reserve Bank of India may be moving too fast, too soon, in its efforts to resolve the bad loan mess.

- Anand Adhikari

The world’s largest economy, the US, has seen a decline in bankruptcy momentum in the last decade. From 300 bankruptcy filings (with debt of $4,09,534 million) in the 2008/09 period, subsequent to the global financial meltdown, the number of filings came down to 70 (debt of $1,06,929 million) in 2017. Its current Bankruptcy Act, which came in into effect in the late ’70s, has seen numerous amendments to make it more relevant to the present times. But, back home, the year-old Bankruptcy Act has been creating a flutter.

The Reserve Bank of India (RBI) has already scrapped all the earlier restructuring schemes, sending a message to banks to straightaway take the bankruptcy route for distressed companies. The government has amended the Act twice already within a year of its operations to plug loopholes and has also set up a committee to make substantial changes in the Act. After directing 40 odd companies to bankruptcy court, the RBI issued a new directive to banks recently to refer distressed companies with loan amount under default over ₹2,000 crore to bankruptcy. Experts warn that the RBI is moving too fast, too soon in the hope of a speedy resolution. There also exist constraints in the form of higher provisioning for banks, limited capital, lack of bidders and also the limited capacity of the National Company Law Tribunal (NCLT), the adjudicating authority, to dispose of cases within 180 days.