The Reserve Bank of India (RBI) today barred banks and financial institutions from extending loans to promoters and entrepreneurs, who have siphoned off funds and engaged in frauds for five years to start new ventures.
"The entrepreneurs/promoters of companies where banks have identified siphoning/diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, development financial institutions, government-owned NBFCs, investment institutions, for floating new ventures," RBI said in a circular this evening.
The five-year ban will kick in from the date the promoter's name is included in the list of wilful defaulters, put out by RBI.
In addition, the regulator has expanded the definition of wilful defaulters following a Supreme Court order. Now, units that fail to repay loans but dispose of assets that were plegded to get credit without knowledge of banks will also be declared as wilful defaulters.
At present, RBI terms units as wilful defaulters that have failed to make payments despite having a capacity to honour obligations and those defaulters who are not using bank funds for the purpose for which financial assistance was sought and instead, have diverted funds for other purpose.
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The move comes at a time when delinquency rates are rising in the wake of a slowdown and rise in interest rates.
Bankers said the move will give clarity to banks in holding back loans and checking a rise in wilful defaults.
In recent months several banks have tightened internal regulations to ensure that they do not fall prey to defaults particularly from those with questionalble past. Defaults had hit banks in the 1990s.