RBI governor Raghuram Rajan has said that a new bankruptcy code will help bring pure capitalism back where borrowers will be held accountable to their loan contracts with banks.
On the bad loan problem, Rajan said, “Our first task was to give bank sufficient powers. We don’t have a great bankruptcy code – the government is coming up with one which hopefully it will introduce in the next session of Parliament. In the meantime, we had to come up with a resolution process which was almost put together with sticking tape,” said Rajan in an interview to CNBC.
The new bankruptcy code is expected to help banks take control of failed businesses where promoters have defaulted on loans.
Stating that the primary objective should be to change the current climate where corporates raise debt from banks but treat it as equity when the going gets tough. “Equity is equity and debt is debt, let us not confuse the two. It cannot be win-win for the entrepreneur and lose-lose for the bank,” said Rajan. He added that without a bankruptcy code, borrowers are essentially telling banks, ‘I am your problem now and tell me what hit are you taking’. “We want to bring pure capitalism back, which is: a contract is a contract,” said Rajan. “That’s what we’re in the process of doing by giving the banks a few more powers and asking them to enforce their contracts.”