All you need to know about wilful defaulters

Banks, especially government-owned lenders are reeling under pile of bad loans, thanks to economic downturn and Reserve Bank of India’s (RBI) fiat to accelerate recognition and provisioning for weak assets.

Most companies and individuals that fail to pay up, do so due to slowdown and things going horribly wrong for factors beyond their control. 
 

However, there are some truant borrowers — corporate and individuals — who, despite having the capability to repay money, do not cough up money. They are alleged to be doing it wilfully.  For lenders, getting money from them is often a long legal battle.

How does a company or individual become declared as a ‘wilful defaulter’ and what is its impact? Here‘s a quick tutorial on the scope and meaning of what it means to be identified as a wilful defaulter.

 

According to the RBI, a wilful default is deemed to have occurred in any of the following four circumstances:

1. When there is a default in repayment obligations by the unit (company/individual) to the lender even when it has the capacity to honour the said obligations. There is deliberate intention of not repaying the loan.

2. The funds are not utilised for the specific purpose for which finance was availed but have been diverted for other purposes. 

3. When the funds have been siphoned off and not been utilised for the purpose for which it was availed. Further, no assets are available which justify the usage of funds.

4. When the asset bought by the lenders’ funds have been sold off without the knowledge of the bank/lender.  

Further, in cases where a letter of comfort or guarantees furnished by group companies of wilfully defaulting units are not honoured when they are invoked by the lender, then such group companies are also considered to be wilful defaulters.

High Costs

Being a wilful defaulter means that the individual or company can attract certain penal measures.

Banks and institutions are required to submit the list of suit-filed accounts of wilful defaulters at the end of every quarter to the Credit Information Bureau (India) Ltd (CIBIL).

Banks also report the names of current directors as well as directors who were associated with the company at the time the account was classified as defaulter. This helps to put other banks and institution on guard against such individuals. This list can also include independent and nominee directors.

The worst thing that can happen if one is labelled a wilful defaulter is it pretty much chokes off most credit channels since no additional lending facility is available from any bank or institution.

Also, it shuts the door on any new ventures — a wilful defaulter is not permitted to float any new business for a period of five years from the date of being declared a wilful defaulter.

Lenders are also expected to initiate legal process, which can include criminal proceedings if necessary, against the borrowers/guarantors and foreclosure of recovery of dues is expedited.

But most importantly, banks and institutions have been given the right to change the management of wilfully defaulting company.

Given such stringent norms, few companies would like to have a wilful defaulter on their board. This might explain why Kingfisher Airlines and Mallya are trying so hard to shake off this tag.

At present there is no specific law for legal action against Wilful defaulters. Reserve Bank of India has framed rules defining willful default, process to be followed by banks for declaring borrower as “willful defaulter”. Banks initiate action against such accounts under laws like SARFAESI Act.

Parliamentary Standing Committee on Finance in its report presented on February 24, 2016  recommended that as a measure of public accountability, each bank must make names of "wilful defaulters" public.  Relevant laws and regulations should be amended to enable banks to make names public, panel said.

It will act as a deterrent for other promoters against wilful defaults. It would also enable banks to withstand pressure and interference in dealing with the promoters for recoveries or sanctioning further loans, panel said.

According to panel wilful defaulters owe Public Sector Banks a total of Rs 64,335 crore, which constitutes about 21% of the total NPAs.