RBI working on exit route for businesses facing bankruptcy

The Reserve Bank of India (RBI) is working on a regulatory framework for voluntary withdrawal by businesses with the new Companies Act providing for an honourable exit for investors from unattractive or loss-making businesses.

In the absence of a well defined bankruptcy code in India, the Reserve Bank has to frame a new regulatory system to enable entrepreneurs seeking to exit insolvent business, RBI executive director B Mohapatra said.

He said in India the bankruptcy has a stigma attached to it as. Also, businesses cannot fail as entrepreneurs are only supposed to succeed in businesses. They have no right to fail, he said.

"We have a tendency in India that we do not like failures. We think everybody should pass and have distinction. We do not have a culture to accept failures.

"How to create that? There is a thinking in Reserve Bank, we have been thinking how to create a system so that people should voluntarily withdraw from an unattractive business," Mahapatra said in his address on "Managing Stressed Assets", organised by Assocham.

However, he said while there is a talk of providing a legal provision in the Companies Act in this regard, there needs to be regulatory framework for the voluntary withdrawal by the entrepreneur.

He said the problem of stressed asset, particularly those of public sector banks, where the problem is more worrisome, is closely connected with business failures.

"Reserve Bank has now provided a system of incentives and disincentives for following rules of the game for corporate debt restructuring (CDRs)."

RBI has also established a Credit Central Repository of Information to identify stressed assets. It ensures that if a large borrower defaults with one bank, the information about the same is passed on to the other banks on quarterly basis, he said.