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Need strong insolvency law to prevent fraud: Rajan

business Updated: Aug 13, 2014 23:59 IST
HT Correspondent
HT Correspondent
Hindustan Times

The Reserve Bank of India (RBI) is working with the Centre to improve governance in public sector banks, RBI governor Raghuram Rajan said on Wednesday and called for a bankruptcy code to prevent misuse of the system in future. The governor also warned of crony capitalism slowing down the economy.

“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.

“There are some people who have used the system in one way that I (the person) get all the benefits you (system) bare the costs...We are trying to get reasonable powers for banks...not to be held up in every court and to be able to get their money back,” he added.

Rajan also reiterated that reducing interest rates was not the right thing to do currently as it would only fuel inflation unless supply-side issues were addressed.

Citing that one of the greatest dangers to the growth of developing countries including India is the middle-income trap, where crony capitalism is slowing down growth, the RBI governor said: “Crony capitalism kills transparency, kills competition, is harmful to free economic enterprise and economic growth. Some countries that have had this problem got stuck in middle-income trap.”

Lending, particularly to the infrastructure sector, has left many banks with bad loans and the central bank and government were working together to clean it up, he said. “We are working very hard to reduce bad loans in the public sector system...The government and RBI have seized up the issue and working very hard to make sure we reform the system.”

He also emphasised the need to clearly distinguish debt and equity since one often confuses 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.

However, merger of state-owned banks may not necessarily cure all the ills; for instance merger of two “unhealthy” banks could create more issues,he added. So one would have to look at it reasonably and hence the government was looking at such options carefully, he said.