India's Rajan wants companies to go bankrupt... and that's good

[thesolar65]

India's Sisyphean system for bankruptcy is in the sights of the country's central bank governor, who says reform is desperately needed to protect state-owned banks.

"We want to bring pure capitalism back, which is a contract is a contract," Raghuram Rajan, governor of the Reserve Bank of India (RBI), told CNBC in an exclusive interview. "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."

Without that, companies don't fear resolution and instead put the squeeze on banks to bail them out, he said.

"Without a bankruptcy code, you basically tell the banks, 'I'm your problem now and tell me what hit are you going to take,'" he said. "It can't be win-win for the entrepreneurs and lose-lose for the banks. It has to change."

The bankruptcy code has been a key reform pursued by Prime Minister Narendra Modi's administration, which swept to power last year promising to change the country's famously inhospitable climate for business.

The changes appear sorely needed. The World Bank's ease of doing business survey, released in October, has ranked India at 130 out of 189 countries. When it comes to the ease of enforcing contracts between two domestic businesses, India takes around 1,420 days and costs nearly 40 percent of the value of the claim to resolve disputes, ranking the country at 178 out of 189 countries, the survey found. That compares with China's 453 days and a cost of around 16 percent of the value of the claim.

When it comes to bankruptcy, India doesn't fare much better. On average, it takes around 4.3 years to resolve a claim, costing around 9 percent of the debtor's estate, with an average recovery rate of 25.70 cents on the dollar, the survey found. India's bankruptcy system ranks at 136 out of 189 countries, well below China's 55.

Rajan expects the bankruptcy reforms will be introduced into the next session of parliament. Proposals include imposing deadlines for the first time.

"In the meantime, we've had to sort of put together a resolution process almost with sticking tape," Rajan said. "That we have now under way and that gives the banks powers to resolve a bad debt situation in a way that puts the asset back on track."

India's Rajan wants companies to go bankrupt... and that's good - Yahoo Finance

@Guynextdoor2 @Rain Man (some CA experience input) @Aminroop @AUSTERLITZ @Skull and Bones Opinions please.

 

[thesolar65]

@ranjeet @SarthakGanguly @anant_s @Srinivas @nair

@Nair saab @Mike_Brando @egodoc222 @Rangila @HariPrasad

 

[Nilgiri]

I am in favour of this.

Reduces NPA% and inefficiencies within the economy at large (by removing resource allocation to ultimately unprofitable activities) as early and promptly as possible.

A solid bankruptcy code is definitely required. Making it easy for businesses to be created must be balanced by letting those that dont make the market grade to get re-absorbed into the larger fold without creating diabetic/fat pockets in the economy as much as possible. Only 1 out of many businesses become successful these days....a society must never be in favour of supporting vested inefficient interests.

Fits with the Hindu cyclical philosophical view very well too (creation, preservation/expansion and destruction....back to creation and continues). If we create unneccesary bottleneck anywhere, we only hurt Indian business/mercantile acumen and ultimately Indian society and India itself in the long run.

 

[anant_s]

The trouble as on today is as follows:
Businesses borrow money from lenders and based on their business models repay the money back in a fixed time-frame. Today when anyone of us wants loan, we study where to go and which is the best loan for us (in terms of interest rates, serviceability etc).
However lenders donot know for sure, how will their money return back and more importantly what happens in case company goes bust (or insolvent).
Unfortunately in India, rules are complex and when a business goes bust, exceedingly long legal procedures make recovery of debt a very complex and time-consuming process. The results are what we call as Bad Loans and that means load on balance sheets leading to Non Performing Assets (NPA)

A Non-performing asset(NPA) is defined as a credit facility in respect of where the interest and/or installment of principal has remained ‘past due’ for a specified period of time. These are essentially Bad Loans or defaults. Usually, any amount to be received remains overdue for a period of more than 90 days is termed as a NPA.

NPAs are on rise and several credit agencies see this as Indian Banking sector getting under stress that will have a major impact on money flow mechanism that is lifeline of business.

Trouble with Law
There are different laws and agencies to cover for entire gamut of bad loans or recovery thereoff. The problem is that these have overlapping jurisdictions and often the time and resource it takes to reach conclusion, the lender has already taken quite a hit to its business

Proposal
A Banking Law Reforms Committee (BLRC) was formed by Government of India under Mr. T K Vishwanathan in August 2014 and they submitted a report in February this year.
http://finmin.nic.in/reports/Interim_Report_BLRC.pdf

Based on this report , the major highlights are

1. Having a unified insolvency law and agency to decide the matter of bankruptcy.
2. Maximum period of 6-9 months for completion of proceedings in such cases.
3. Identification of any early signs of financial stress for timely corrective action.
4. Debt Recovery Tribunal to be adjudicating authority in case of insolvency by an individual or unlimited liability partnership firms.
5. National Companies Law Tribunal be responsible for companies and limited liability entities.
6. Setting up of an information mechanism to have a database on borrowers.

Bankruptcy law is a long standing demand of industry and now with government looking resolved to clean banking system with focus on reducing NPAs, this law will go a long way in improving overall health of financial lending institutions.

 

[Nilgiri]

I expect BJP to deliver on this promise. I followed Jaitley bringing it up on the last budget presentation. From what I have written down in my log book here, he said it will be based on a comprehensive code up to global standards.

R. Rajan is also doing quite a stellar job I have to say.

Things are looking quite good for India at macro and micro level compared to before.

 

[Levina]

@Guynextdoor2 @Rain Man (some CA experience input) @Aminroop @AUSTERLITZ @Skull and Bones Opinions please.

I am dilettante when it comes to finance...I will wait for @Rain Man 's post.

However lenders donot know for sure, how will their money return back and more importantly what happens in case company goes bust (or insolvent)

Isn't this why lenders/ banks ask for security when someone applies for loan???

 

[egodoc222]

thanks for the tag!
Excellent proposition!!!
Good move by MR.Rajan
But we need more clarity over the special powers to the bank to enforce contracts...he is proposing...
Too stringent rules to may put off the investors!!

 

[Nilgiri]

But we need more clarity over the special powers to the bank to enforce contracts...he is proposing...
Too stringent rules to may put off the investors!!

He has already said many times that it will be in line with global standards. Investors will actually be more comfortable with this I would imagine. We may then refine to local situation once GDP per capita bulks up well past what it is now.

 

[dray]

Very good development, corporates are the single largest reason of NPAs in the banks, and that too by a huge margin...a strict law will stop this swindling of public money by the corporates and make them more responsible with their debts.

 

[Levina]

Very good development, corporates are the single largest reason of NPAs in the banks, and that too by a huge margin...a strict law will stop this swindling of public money by the corporates and make them more responsible with their debts.

Bass innnaaa sa post???
you lazy cartoon!!!

 

[dray]

Bass innnaaa sa post???
you lazy cartoon!!!

Re-posting from the chat with you @levina !!

Actually there are barely any effective bankruptcy laws for the big corporates, and the legal process is very long and costly. When a business takes a loan, it is meant to be repaid, or bank should have a quick and cost-effective resolution to recover the fund by selling off the business beyond a reasonable time. In case of big corporates, the security provided is often dubious or insufficient (check Kingfisher airlines), they are allowed to swindle money between their businesses (again check Kingfisher airlines, huge sums were transferred to their liquor business for using the Kingfisher brand name of their beer which was not such a big name either), and they have the money power to hire top advocates to manage legal cases...why should Essar group be allowed to get away without paying their debts to the banks and still run their business and make profits? Banks should have full rights to go beyond the securities given and cease other assets of the company, if needed, then cease the company itself to recover their money within a given time frame, and with minimum legal hassle. If the money has been swindled to other companies of the same owner(s)/group, then bank should be able to pull them up too.

 

[Levina]

Actually there is barely any effective bankruptcy laws for the big corporates, and the legal process is very long and costly. When a business takes a loan, it is meant to be repaid, or bank should have a quick and cost-effective resolution to recover the fund by selling off the business beyond a reasonable time. In case of big corporates, the security provided is often dubious or insufficient (check Kingfisher airlines), they are allowed to swindle money between their businesses (again check Kingfisher airlines, huge sums were transferred to their liquor business for using the Kingfisher brand name of their beer which was not such a big name either), and they have the money power to hire top advocates to manage legal cases...why should Essar group be allowed to get away without paying their debts to the banks and still run their business? Banks should have full rights to go beyond the securities given and cease other assets of the company, if needed, then cease the company itself to recover their money within a given time frame, and with minimum legal hassle. If the money has been swindled to other companies of the same owner(s)/group, then bank should be able to pull them up too.

I'm sure this will help many like me understand the gravity of the situation.

Re-posting from the chat with you @levina !!

Most of them write long boring essays or copy paste it from other sites, but not you. Soooo I was expecting a longer post from you.

 

[egodoc222]

He has already said many times that it will be in line with global standards. Investors will actually be more comfortable with this I would imagine. We may then refine to local situation once GDP per capita bulks up well past what it is now.

Indian market is a chaos to say the least...I don't think following global standards blindly might not work here!!!

 

[Nilgiri]

Indian market is a chaos to say the least...I don't think following global standards blindly might not work here!!!

They aren't going to be implementing anything blindly obviously. They will have read up on bankruptcy code reformation in multiple case studies and leave enough flexibility to adapt after its adoption as required.

 

[Providence]

the larger fish will get to draw cash from global sources. Smaller ones would suffer.

Unfortunately it's the larger corporations who will wield power in the negotiations