Banks must file for bankruptcy after three months of recovery effort: Viral Acharya

Banks must file defaulted loan accounts for bankruptcy if they cannot rectify the issue within three months, Reserve Bank of India (RBI) Deputy Governor Viral Acharya said on Wednesday.

Coming down heavily on large corporate non-performing assets (NPAs), Acharya said: "I think we should give banks three months to rectify the (defaulted) account. If you can't rectify the account, it is an NPA, you've to file this case in bankruptcy. Period. Chapter closed."

Even while banks have initiated insolvency proceedings at the National Company Law Tribunal (NCLT) against more than 12 large corporate accounts on the directions of the RBI, Acharya said, "RBI should not be in the business of creating restructuring schemes for banks."

The banking sector is grappling with NPAs worth more than Rs 8 lakh crore, accounting for nearly 10 percent of the total loans in the industry.

According to Acharya, banks should engage in renegotiation much before default has actually taken place.

"Right now, we are starting the process of resolving our enterprises and companies and other borrowers who are failing at a very low point of enterprise value. Our loan recoveries are in the order of 15-25 paise to a rupee," he said, addressing a gathering at the book launch of former RBI deputy governor Rakesh Mohan.

Comparing robust bankruptcy systems in the other parts of the world, Acharya said their timely resolutions and overcollateralising of their bad loans before a default is actually going to take place helps them recover 85-90 cents to a dollar.

On being asked by Mohan about what he would change at the central bank, the deputy governor said, "Because the regulator (outside India) is tough on banks when defaults take place, bank doesn't want a default... the promoter or the entrepreneur or the borrower doesn't want default (fearing bankruptcy). Hence, everyone is actually trying to avoid defaults and provide for in good times, rather than saying 'Okay default has taken place, now let us figure out how we are going to deal with this problem'."

"This is the number one thing I'd like us to change at the RBI. I think then we won't have lending booms and busts at least at the frequency that we are having currently," he added.

The panel at the book launch was also attended by Mahindra & Mahindra Chairman Anand Mahindra and ICICI Bank CEO and MD Chanda Kochhar.