Diluting IBC a major cause of rift with Centre, says former RBI governor

Sruthi Vibhavari

Former RBI Governor Urjit Patel revealed that the moves to dilute the Insolvency and Bankruptcy Code (IBC) caused disagreements between the Centre and the RBI. In his latest book Overdraft: Saving the Indian Saver, Patel disclosed several insider details regarding decisions that indirectly might have resulted in his premature exit from the central bank.

Urjit Patel headed the Reserve Bank of India from September 2016 till December 2018, when he resigned stating personal reasons.

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According to him, the rift is centered around the RBI circular of February 2018 which forced banks to classify borrowers as defaulters when they delayed payments. The circular also barred the founders of defaulting companies from trying to buy them back during insolvency auctions. The government seemed to have lost enthusiasm regarding IBC in the middle of 2018, he says.

In the chapter titled ‘The Empire Strikes Back,’ he writes “Instead of buttressing and future-proofing the gains thus far, an atmosphere to go easy on the pedal ensued.” Though he did not point fingers, the mid-2018 clearly states the period when Piyush Goyal held the finance ministry temporarily. “Until then, for the most part, the Finance Minister and I were on the same page, with frequent conversations on enhancing the landmark legislation’s operational efficiency,” he states.

He further writes that the government might have believed that the deterrence effect of the IBC had been achieved and that there were requests to roll back the February circular. Not too long after that, “a canard was spread,” he writes. This falsehood incorrectly suggested that small businesses would suffer disproportionately. This eventually led to the Supreme Court striking the RBI’s February circular, stunning the Indian business world.

The decision “made the insolvency regime vulnerable, possibly brittle,” Patel said.

Shaktikanta Das, the current RBI governor, gave lenders 30 days to review a defaulted account and a further 180 days to implement a resolution plan. He also lifted the deadline to push defaulters into bankruptcy. This easing of rules loosened the previous timeline set by the RBI. “Since the time-bound threat of insolvency application is not credible anymore, it is unclear what threat points will compel resolution in 180 days (or, for that matter, even 365 days),” Patel wrote in his book.

Patel’s exit was followed by the resignation of Viral Acharya, his deputy. Acharya’s yet-to-be-published book also echoes concerns about bad-debt. He writes, “Plans to clean up and recapitalize the banking system were ready but in about 10 months to follow, not only did progress stall but also several policies regressed.”

Besides, in November 2018 — a month before Urjit Patel resigned, the Modi government proposed rules that enable closer supervision of the central bank. This included setting up panels to oversee the central bank’s functions including management of financial stability, foreign exchange, monetary policy decisions, etc. A proposal to empower RBI’s board to include government nominees was also put forward. Attempts to alter the governance structure of the RBI “would have meant crossing the Rubicon and had to be foiled,” Acharya wrote, without elaborating.

“As a result, the RBI lost its governor on the altar of financial stability,” he pitches.

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