Former RBI deputy governor Viral Acharya on Wednesday said the suspension of insolvency laws for a year is "too long" and India should look at operationalising the bankruptcy rules in the next three months.
Acharya also said that there is a need for adequately capitalising all the banks, so that they are in a better position to help the needs of the economy amid the COVID-19 pandemic, which is bound to have its costs.
The government had announced that no fresh cases will be undertaken under the Insolvency and Bankruptcy Code after the onset of the pandemic.
"I am personally not in favour of the suspension of the bankruptcy court for fresh bankruptcies that has been announced for a whole year. I think that's too long,” Acharya said at the annual awards of Entrepreneur magazine.
Acharya, who went back to New York as a professor of economics after quitting his job at the RBI six months before the end of his three-year term, said bankruptcy should not be seen as a punishment, but as a way to restructure debts and pitched for the courts to reopen in the next two to three months.
There will be two kinds of stressed companies at present, he said, adding that the first category will be ones having old technologies which need to undergo the process of “natural creative destruction” while the second will be the ones where the technology will be relevant but are impacted on a temporary basis.
He said that the moratorium on loan repayments will help provide the temporary relief and hinted that the bankruptcy process is also a kind of debt restructuring itself.
“…if debt restructuring doesn't take place and debt burdens keep rising, I see it as a potential problem to both, the cleaning up of the old sectors as well as the financial restructuring of those who have temporarily got into trouble,” he said.
“We should position banks with adequate capital so that they are willing to take losses and help firms restructure,” he added.
He said during the pandemic, there is a need to provide long term finance for entrepreneurs which is more on the lines of equity, but not focus on the short term financing solutions alone because none of us know how long the crisis will last and the time each business will take to come out of it.
"First and foremost, banks need to be well capitalised. They need to have capital on their balance sheets to be able to absorb losses," he reiterated, adding that it is unfortunate that banks have spent the last decade fighting legacy problems.
Acharya said there is also a need to look at "sachetization" of finance to help the large swathe of micro entrepreneurs, like the way it was done by consumer goods companies a few decades ago and has yielded rich dividends.
Sachetization refers to business strategy where a company produces products in smaller quantities or in sachets. Entrepreneurs need to be incentivised to join formal finance by communicating it to them that such a shift is a pre-requisite for making it big, he said.
Acharya said during his stint at the central bank, the RBI had started work on a public credit registry and also having an account aggregator in place, which will ultimately help in the shift to “sachetization” of finance.
He also asked the entrepreneurs to be more sensitive about the wider society, stressing a country or a society becomes great through values it creates for the last mile consumer or citizen. "While you push on your own ideas, I would urge all of you to keep in mind that in the end, we have to make the whole add up to more than the sum of the parts," he told the entrepreneurs.
Source:- moneycontrol.com