NEW DELHI: Differences over a strict new bankruptcy law led to a rift between the Government and the Reserve Bank of India, according to former RBI Governor Urjit Patel.
The RBI had issued in February 2018, a circular which called upon banks to classify borrowers as defaulters within one day of delay in repayment of loans beyond a timeline of 180 days and disallowed corporate debt restructuring for defaulters.
In his book -- Overdraft -- released on Friday, Patel, who ran the central bank for two years till December 2018, said there were attempts to soft pedal on the new rules. "From July 2018, onwards, the IBC (Insolvency and Bankruptcy Code) was felt, at least by some lobbies to be constraining... too strict on borrowers," he wrote.
"Instead of buttressing and future-proofing the gains thus far, an atmosphere to go easy on the pedal ensued," Patel wrote. "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."
The government seemed to feel that a deterrent effect had been achieved. The former Governor reveals "there were requests for rolling back the February circular" on the plea that it was harsh on small businesses.
EDITORIAL | Entrepreneurship lessons from COVID-19 times
Eventually, a new circular was issued in June 2019 after his resignation which dilated the February circular among other ways by giving an extra 30 days breathing time to defaulters.
In his book, Patel has criticised the dilution by saying the consequences for higher provisions by PSU banks will be felt by taxpayers as the Government will have to shore up their capital.
Patel, when he resigned, had refused to comment on the reasons for his resignation. In his book, he says "lawyers who had agreed to represent the RBI in the Supreme Court (against a challenge to the February circular) dropped out at the eleventh hour, literally the night before the hearing."
It was known that differences, as well as consultations between the finance ministry and the RBI, were on three counts -- the February circular which was seen as too rigid, transfer of the RBI's reserves as profits to the government, and conditions for loans to stressed power plants, run by some of India's top business houses.
Patel, the current Governor Shaktikanta Das' predecessor, was also believed to be upset with a plan to appoint board committees to supervise the central bank's functioning as traditionally the RBI governor and his deputies perform their functions independently and the board merely takes cognizance of administrative matters.
ALSO SEE: