Rajan explains why India needs bankruptcy code

I was hopeful that the bankruptcy code embedded in the new Companies Act would be operational soon, the RBI Governor said.

The Reserve Bank of India has stressed the need for a bankruptcy code.

Speaking in Mumbai on Wednesday, RBI Governor Raghuram Rajan said, “Something that is being said for six years now. I was hopeful that the bankruptcy code embedded in the new Companies Act would be operational soon.”

There was some difficulty needing sorting, he added.

On bank mergers, he said utmost care was needed while considering such proposals. “If you merge two unhealthy banks, it may create a big unhealthy bank, which creates bigger problems in the economy.

“If you merge an unhealthy bank with a large healthy bank and the large healthy bank is not able to swallow, you are bringing the large healthy bank into a problem,” Rajan said.
In the best of all worlds, he said, there would be mergers of strong banks -- they have the resources, health and culture and it’s in their interest to merge.

“Having to fix the underlying problems at the same time when you are dealing with all the cultural problems that comes with a merger might be difficult.

“So, we have to approach this very carefully, in a reasonable way.

“The government is looking at such options carefully,” said Rajan.

The governor’s statement comes at a time when the government has revived the issue of consolidation among public sector banks.

Mergers between IDBI Bank & United Bank of India, Punjab National Bank and Dena Bank are being speculated on. Merger of the associate banks of State Bank of India with the latter are being contemplated.

Today, there is a lot of confusion on debt and equity. Rajan wants that confusion to change.

“We need equity to be seen as equity and debt to be seen as debt,” he said.
In the recent past, the rupee has been volatile due to moves of the US Federal Reserve.

“We have international sources of volatility coming into our country.

“But we can't use that as a crutch. We have to follow good macroeconomic policies,” Rajan said.

According to him, since India has a low fiscal deficit, a low current account deficit and lower inflation, there is no need for being too dependent on foreign money for growth.

“We saw some volatility in the last couple of days.

“The dollar strengthened and the rupee weakened.

“I don’t think among real exchange trading partners we were that weak,” he said. Rajan feels that is going to be repeated.

However, with the macro economic position, the growth prospects and the political situation, the country mighty not be so vulnerable.

The RBI chief reiterated the need to get inflation under control.

“When I raise interest rates, I do keep an eye on demand.”
Rajan compared his interest rate increases to that by a previous chairman of the US Fed, Paul Volcker.

“I haven't raised rates to Volcker-like levels,” he said adding that Volcker had raised interest rates to as high as 16-18 per cent.

According to Rajan, the financial markets are fairly efficient in India, due to which inflationary expectations get into bond prices very quickly.

Recently, the asset quality of banks has emerged as a concern in the sector. The problem was more with PSBs.

“We are working very hard on reducing bad loans in PSBs.

“Getting banks to cooperate with each other. We have the new joint lending forum and are creating information sharing between banks,” said Rajan.

Infrastructure lending had not proceeded to be as profitable for banks as they’d thought. Due to this, banks are saddled with a lot of bad loans.

He said RBI and the government were working to improve governance.

Image: RBI Governor Raghuram Rajan