India needs bankruptcy code, says RBI Governor Raghuram Rajan

Reserve Bank of India Governor Raghuram Rajan on Wednesday said there is a pressing need to have strong and effective bankruptcy laws in the country.

"Do we need a bankruptcy code? absolutely! It is something I have been saying for six years in reports that we need a bankruptcy code," he said while speaking at an event in Mumbai late Wednesday evening.

Replying to a specific question on the need for bankruptcy laws, Rajan said he was hopeful that the code embedded in the amended Companies Act passed last year will help things, but it has been stuck due to some issues which need to be worked out.

It may be noted that many stakeholders in the system, especially the lenders have been desirous of having provisions like the Chapter 11 bankruptcy proceedings in the USA to smoothen the pace of liquidation in cases of stress.

Due to the ongoing economic gloom, the level of non-performing assets in banks have risen to concerning levels and the RBI had previously said that it expected the stress to rise further and then improve from next year.

Rajan said there should also be clear distinction between debt and equity, saying that we often confuse between the two while dealing with stressed assets.

"Today there is a lot of confusion, what is what? Debt often looks like equity because it absorbs the hit while equity looks like debt because it is senior to debt holders.

We need that confusion to be changed," he said.