Banks and government-owned lenders are continuously dealing with a huge pile of loans that are on the verge of becoming a non-performing asset (NPA). Due to the economic downturn, RBI took certain sincere steps to accelerate the recognition and provisioning of weak assets. Many borrowers including individuals and companies, fail to pay up their loans due to slowdown in business or other factors which are beyond their control. But there is another category of borrowers who by choice, and wilfully choose not to repay the money. They are the alleged for doing it wilfully, even when they are capable of repaying the debt. For lenders and financial institutions, recovering money from such category of borrowers involves a long legal battle.
The apex institution, Reserve Bank of India (RBI) has laid down several guidelines and has made sincere efforts to ensure that wilful defaults of non-repayment of loans, do not adversely affect the functioning and health of the banks and other financial institutions. The series of steps to curb the practice of wilful defaults, started in the year 1999, when the Central Vigilance Commission instructed the banks and other notified financial institutions to provide information on wilful defaults for more than 25 lakhs. Since then, the banks regularly submit such information on wilful defaults, to RBI.
In recent times, the rising cases of NPA and wilful defaults caught the attention of the regulatory bodies and certain modifications were made to identify wilful defaulters and the procedures that should be initiated against them.
Who is a wilful defaulter?
Default in simple language means non-repayment of a loan availed from a bank or financial institution. A wilful defaulter is any entity that can be an individual or a company, that has not paid and will not repay back the borrowed amount, despite having the ability to repay it.
As per guidelines of RBI, a wilful default occurs when one of the following four circumstances take place:
- When there is a default in repayment obligations by an individual or company, even when the borrower has the capacity to honour the said repayment obligations. There implies there is a deliberate intention of not making the repayment of loan.
- The funds borrowed are not utilised for the specific purpose for which it was availed but have been diverted for other purposes.
- When the funds have been drained off and are not been utilised for the purpose that was specified while availing the loan. Also, there is no justification of assets, to specify the usage of funds.
- When the assets which were given for the purpose of securing the loan are sold off without the knowledge of the bank or the lender.
Areas covered under wilful default
According to RBI regulations, wilful defaults covers several broad areas:
- Intentional non-payment of the loans borrowed despite having sufficient cash flows.
- Siphoning or diversion of funds to non-priority areas leading to detriment of the borrower.
- Assets and proceeds have been mis-utilised
- Any misrepresentation and deceit in records of the borrower to conceal the fraudulent transactions.
- Disposal of securities and assets that were given to bank for securing the loan, are disposed-off without the knowledge of the lender.
- Identification of wilful default should be done on the basis of past track records of the borrower.
- No wilful default should be decided solely on the basis of isolated transactions or individual incidents.
- Wilful defaults are calculated and a deliberate attempt of non-repayment on part of the borrower.
- Cases where a letter of guarantee which are furnished by a group of individuals or companies of wilful defaulter units are not honoured when invoked by the bank or lending financial institution, then such group of individuals or companies are also considered to be wilful defaulters.
Consequences of Being Declared as a Wilful Defaulter:
- Promoters of companies which are identified by the banks for fraudulent siphoning of funds or diversion of funds would be completely debarred from institutional finance from scheduled commercial banks.
- Companies identified for misrepresentation or falsification of accounts will be debarred from floating any new ventures for a minimum period of five years from the date the name of such wilful defaulters is published in the list produced by RBI.
- Market regulator SEBI has imposed certain obstructions for such wilful defaulters in order to restrict their access in the capital markets and prohibit them from raising the funds.
- Lenders and financial institutions may initiate criminal proceedings against wilful defaulters and the former shall also initiate a change of management of the borrowing company.
High Costs
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- If an individual or a company turns out to be wilful defaulter, it means that they are attracting serious penal charges against them.
- Banks and other financial institutions are required to submit a list of suit-filed accounts of wilful defaulters, after every quarter to the Credit Information Bureau India Ltd.
- Banks and financial institutions also report the names of directors who were associated with the defaulting company.
- For a classified wilful defaulter, all the credit channels are choked-off and are also debarred from any additional lending facility from any bank or financial institution.
- A wilful defaulter is not permitted to launch any new business or venture for a period of five years from the date of being declared as a wilful defaulter.
- Lenders also initiate legal proceedings against the wilful defaulters, which includes criminal proceedings and foreclosure of recovery of dues is also accelerated.
Presently, we do not have a specific law in place for legal action against Wilful defaulters. Reserve Bank of India has framed rules defining wilful default, process to be followed by banks for declaring borrower as “wilful defaulter”.
Statistics Of Willful Defaulters
The Parliamentary Standing Committee presented a report on February 24, 2016, with recommendations that as a step towards public accountability, each bank should submit a list of wilful defaulters to RBI.
Relevant laws and regulations should be laid down to make the names public. According to a report, if combined for all the wilful defaulters, they owe the Public Sector Banks a total of Rs 64,335 crore, which constitutes about 21% of the total NPAs. The loans outstanding written off as bad debts on account of top 50 wilful defaulters as on September 30, 2019, was Rs 68,607 crore.
India’s state-owned banks had classified ₹1.50 trillion worth of loans as “wilful defaults” in the year 2018-19, the biggest lender being the State Bank of India. The State Bank of India saw the highest number of wilful defaults at ₹46,158 crore, Punjab National Bank stood at ₹25,090 crore, and Bank of India stood at ₹9,890 crore.
The Grievance Redressal Mechanism Adopted by Banks and Financial Institutions on Wilful Defaults
Any judgement to classify any borrower as wilful defaulter should be entrusted upon a Committee which is headed by the Executive Director and General Managers Decisions should be taken through well-documented reasons with evidence for which the borrower has been declared as a wilful defaulter, under the adherence to RBI guidelines.
If the Committee comes to a conclusion that an event of wilful default has occurred, it will issue a Show Cause Notice to the alleged borrower and the promoter or whole-time director and call for their submissions. After considering and analysing their submission, the committee shall issue an order recording the facts of the wilful default and the reasons for the same.
An opportunity should be given to the alleged defaulting borrower and the promoter or whole-time director for a personal hearing, only if the Committee feels that such an opportunity is absolutely necessary.
Such borrowers who are alleged to be wilful defaulters are to be provided a reasonable time for making a representation against such decision. The representation has to be made before a Grievance Redressal Committee.
The Grievance Redressal Committee should also give a chance of hearing to the borrower if he represents that he has wrongly been classified as a wilful defaulter. Final verdict to declare as a wilful defaulter should be made only after such representation has been made and after the decision is taken by the Committee.
The 2015 circular also specified the guidelines of the requirement of declaring group companies as wilful defaulters on failure to honour the letter of guarantee furnished on behalf of wilfully defaulting units.
The 2015 Circular also stated that in some rare cases, a non-whole-time director should not be considered as a wilful defaulter, unless there is some conclusive evidence that he was aware of the fact of wilful default committed by the borrower.
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