The Reserve Bank of India (RBI) has done well to shut down the numerous schemes it had put in place to help banks deal with their bad loans. These schemes had outlived their utility once the new bankruptcy process was introduced. They were essentially a regulatory attempt to build a resolution system without the legal backing from a strong insolvency law.

The end of such regulatory forbearance comes at almost the same time that bidding for nine of the 12 large defaulting companies has begun.

The bankruptcy regime will now be tested to the hilt. There could be some hiccups along the way, both in terms of who bids for the assets of defaulting companies as well as the haircuts that banks will have to account for. There is almost no past experience to go by. Every hiccup is likely to create controversy.

However, the direction of overall change is welcome, since capitalism is as much about easy exit as it is about easy entry. The final result should be better allocation of capital by companies that know bailouts will be rare.

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