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The finance ministry is considering a new 'wilful defaulter' legislation that will empower banks to induct new members on the boards of defaulting borrower companies and attach even those assets that had not been pledged.
At a time when the asset quality of state-owned banks is deteriorating, the Reserve Bank of India (RBI) is also planning harsher penalties for wealthy promoters of wilful defaulters.
A committee headed by former law secretary VK Bhasin, with some finance ministry officials as members, has prepared draft of the Bill on 'wilful defaulters'.
"Bank will be able to induct a new management if a company is unable to pay. The name-and-shame policy might be adopted for wilful defaulters. Assets on which security was not deposited could also be seized. For recovery of assets, banks should be able to look at other bank accounts as well. Defaulters often divert funds to other banks," said an official privy to the draft who did not wish to be named.
Besides this new Bill, the finance ministry is revisiting recovery laws to make those more effective. Amendments have been proposed to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act), and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi Act), "to remove lacunae in these laws.
The proposed Bill, as well as amendments to the existing Acts, are likely to give banks the power to reconstitute the boards of defaulting companies.
"If you are trying to run a company with the same set of people you suspect of mismanagement, how much faith can you repose in them? If an independent set of people with the responsibility to run a company report to the bank, they would probably be more professional and fair. This will particularly help in case of promoter-run companies," said K V Karthik, senior director, Deloitte.
Non-performing assets (NPAs) of public-sector banks increased from 3.84 per cent of their assets (Rs 1,55,890 crore) as on March 2013 to 4.72 per cent (Rs 2,16,739 crore) at the end of March this year, mainly because of a sluggishness in domestic growth, a global economic slowdown and an uncertainty in global markets.
The new law would make provisions for faster disposal of cases by debt recovery tribunals (DRTs) and might propose harsher penalties for defaulters deliberately trying to slow down the hearing process, the official said.
"Any adjournment in DRT proceedings due to absence of wilful defaulters will attract a huge penalty. A regular review of large-sized NPAs and wilful defaulters will also take place," he elaborated.
On its part, RBI is considering stricter guidelines to enable banks to declare promoters of defaulter companies wilful defaulters and recover dues from them.
"At present, if a company has defaulted on a loan payment, banks cannot recover money from its wealthy promoters. Banks have asked the central bank to amend its master circular in this regard. That might happen shortly," said the chairman of a large public-sector bank.
RBI Governor Raghuram Rajan had last week said the central bank was trying to ensure wilful defaulters were prevented from accessing all kinds of funds.
Currently, a company is declared a wilful defaulter if it fails to meet its payment obligations despite capacity to honour it, or fails to utilise the finance for the specific purposes it was taken for, or siphoned off funds. Promoters of such companies could be barred from floating new ventures for five years from the date the wilful defaulter's name is published in a list by RBI.
BAD-LOAN MANAGEMENT
LEGAL RECOURSE: New law being considered to deal with wilful defaulters; changes to be made to the two existing recovery laws
POWER TO BANKS: To induct new management on the boards of defaulting companies; to seize assets not put up as collateral
INSTILLING FEAR: The name-and-shame policy might be adopted; regular review of large-sized NPAs and wilful defaulters
PROBLEM FOR PROMOTERS: Banks want RBI to allow them to recover dues from wealthy promoters of defaulting companies
NPA CHECK: NPAs of public-sector banks rose to 4.72% (Rs 2,16,739 crore) as at the end of March 2014, compared with 3.8% in March 2013
TOP DEFAULTERS: According to the All India Bank Employees' Association, top 50 defaulters account for NPAs of Rs 40,528 crore
