Bankruptcy Code can help resolve NPAs, deepen corporate bond market: RBI

Mumbai: RBI Governor Raghuram Rajan on Friday welcomed the Finance Ministry's move to bring in a Bankruptcy Code, saying it will help bankers resolve asset stress and also infrastructure financing by deepening the corporate bond market.

"We need a speedy Bankruptcy Code to resolve distress, while maintaining the priority structure of claims, and I am glad the Finance Ministry intends to bring in one soon," Rajan said, delivering the fourth C K Prahlad memorial lecture here.

The RBI Governor further said the proposed code, on the lines of the bankruptcy laws elsewhere in the world, will not only give the creditors more ability to resolve distress, but will also help strengthen the nascent corporate bond market in the country, which is essential for the large infrastructure financing needs of the economy.

A majority of the developed economies have such a code already, and Finance Minister Arun Jaitley had last month announced that his ministry would be out with such a code anytime soon.

"The bankruptcy code was to be ready by the end of July, and I think it's going to be ready any of these days," Jaitley had said on August 18.

It may be noted that since the past three years, the bad loans issue has assumed alarming proportions with the combined stressed assets ratio (NPAs and restructured accounts) jumping to over 13.5 percent of the system as of the June quarter, with the state-run banks bearing the maximum brunt.

Rajan sought to dismiss allegations of government bonds crowding out private sector issuances in the bond market, saying the "real issue is confidence", which will come through measures like the Bankruptcy Code.

Apart from the code, the RBI is mulling various other measures to strengthen the corporate bond market, including allowing the better-rated banks to issue long-term bonds and not allowing foreign investors a greater play in G-secs which can divert some money to the corporate bonds.

Besides, the RBI is planning to soon allow banks to credit-enhance corporate bonds and is also examining the possibility of reporting high quality corporate bonds.