Modi Govt pressured me to dilute insolvency law: former RBI Governor Urjit Patel

Former Reserve Bank of India (RBI) Governor Urjit Patel’s book, “Overdraft: Saving The Indian Saver”, and his then Deputy Viral Acharya’s work, “Quest for Restoring Financial Stability in India” have stirred a hornet’s nest as Patel alleged that the Centre’s moves to dilute a new insolvency law led to disagreements between the Prime Minister Narendra Modi-led government and the central bank. Former RBI Deputy Governor Acharya said efforts to clean up the banking system and address the mounting non-performing assets (NPAs) problem cost Patel his job. Acharya said as the fiscal space was constricted, the government thought credit-linked growth was the only way forward and the government “wanted banks to be lending left, right and centre.”

In his book, Patel wrote the following about the February 2018 circular that RBI brought out during his tenure. It “removed uncertainty – it brought the sector regulator’s rules in line with the letter and spirit of the IBC 2016, and a retune along three dimensions towards defining an endgame…The ploy of restructured standard assets, which had started about two decades back with circulars on Corporate Debt Restructuring 2001, 2002 and 2005, had to be buried once and for all…The assortment of schemes of recent vintage, introduced as interim instruments, to fill the void pending the legislated IBC could now be closed. It is noteworthy that the track record of these, even after a generous/inordinate period of time, for any resolution was, without exaggeration, poor. The forbearance that was embedded to make it easier to resolve assets became an end in itself; they essentially delayed formal acknowledgement that an account was an NPA…As a natural consequence, the resolution process was to start within a day of default…It further required that if accounts of the defaulting large borrowers were not resolved within six months from the date on which their instalments fell due, then they had no choice but to refer these accounts for recovery/liquidation to the NCLT.”

But Patel said pressure was put to rescind the circular. Patel writes, “There were requests for rolling back the February circular. A canard was spread that MSMEs would especially suffer, when, in fact, the previous dispensations for this class of borrowers had been explicitly protected in the new regulations.”

Patel notes the change in the power corridors about the new law proposed. The disposition with respect to the IBC or, more generally, in the conviction in the pathway, perceptibly changed – conceivably on defensible grounds – in mid-2018. Instead of buttressing and future-proofing the gains thus far, an atmosphere to go easy on the pedal ensued. A case of our old failing of a premature pronouncement of victory, perhaps? 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… I suspect the government may have felt that the deterrence effect – ‘future defaulters beware, you may lose your business’ – of the IBC had been achieved, and resolute follow-up to help complete the task was, therefore, unwarranted. But deterrence works only if defaulters – current and potential – face economic consequences within a (reasonable) timeframe; otherwise we are in danger of a relapse.”

Patel’s work is possibly the first first-hand insight into the tussle between the RBI and the government, culminating in the Supreme Court decision in 2019 that struck down the February circular.

India has one of the worst bad loan ratios amongst top economies of the world and since 2019, the RBI has been acting more as a central agency that seeks to make lending easier for commercial banks when there are few takers.