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In September this year, United Bank of India declared the now-grounded Kingfisher Airlines and its Chairman Vijay Mallya as wilful defaulters for non-payment of dues of Rs 400 crore. Three other directors -Subhash R Gupte, Ravi Nedungadi and Anil Kumar Ganguly - also figured in that list. The airline had described the bank's action as "post-haste" and had vowed to pursue all legal remedies against the decision.
It is more than three months now, and United Bank is still the only bank to have declared Kingfisher a wilful defaulter despite the airline owing close to Rs 6,500 crore, much of it borrowed from a consortium of 17 banks. Kingfisher, meanwhile, has secured a stay from the Calcutta High Court on United Bank's decision to declare the airline and its directors as wilful defaulters. A few lenders, including the country's largest bank, the State Bank of India (SBI), have identified Mallya's company as a wilful defaulter but are yet to declare it as such.
Kingfisher's case is not a stray example. Bankers, on condition of anonymity, reveal that they are yet to initiate action against several other corporate borrowers, whom they want to classify as wilful defaulters, but haven't yet due to lack of sufficient evidence.
"It is more or less certain that if we declare a borrower a wilful defaulter, he will move court. Then it becomes our responsibility to justify our action with supporting evidence," explains a senior banker in charge of loan recovery at a mid-sized public sector bank. It is not always possible to establish that the borrower has siphoned off the money or used it for a purpose other than the one for which the loan was taken. "Hence, we need to be extremely cautious before we declare someone a wilful defaulter. Otherwise, we will not only lose the case, but we will also let the defaulter off the hook," he says.
According to the master circular released by the Reserve Bank of India (RBI) on July 1, 2014, a borrower is classified as a wilful defaulter in any of the following events: (a) the borrower defaults despite having the capacity to repay his dues, (b) the borrower defaults and has not used the money for the specific purpose for which the loan was availed of, (c) the borrower defaults, has siphoned off the funds, and the money is not available with him in the form of other assets, and (d) the borrower defaults and has disposed of the assets given as security against the loan without informing the lenders.
Mundra also says that after getting feedback from banks, RBI marks these issues for the attention of the government. "What we can do and what we do is that we always flag these issues whenever we get feedback from banks," he adds. "We flag these issues in the right forum, for the government. Then in course of time we, seek the resolution. But I cannot just say that ours is the last word and courts cannot override us."
Not an overnight job
The whole process can be time consuming, and bankers say that the lenders need to follow certain processes before identifying and declaring a borrower a wilful defaulter. "It does not happen overnight," says another banker with a Kolkata-based public sector bank. "There is an internal committee that examines cases of wilful defaults. The loan recovery department gives its report on borrowers who are deemed to have wilfully defaulted to this committee. This panel then examines the repayment capacity of the borrower, end-use of the funds, recovery efforts before identifying him as wilful defaulter."
Once a borrower is identified as a wilful defaulter, the bank has to send him a notice detailing the reasons why the borrower has been deemed as such. Sometimes, the lender has to make available to the borrower the documents that it has relied upon to arrive at the decision. Generally, the borrower gets two weeks to make a representation before the bank's grievance redressal committee. Only if the borrower fails to offer a proper explanation for non-payment of dues or fails repeatedly to appear before this committee in spite of notices served, will he be declared a wilful defaulter.
This lengthy and fraught process is why most banks are wary about taking on people and corporate with unpaid dues. Some analysts believe that the banks should be empowered through amendments in laws and allowed to take action without every case going to court. "I don't think it (the delay in classifying a borrower as wilful defaulter) is because of a problem with our judiciary," explains Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services and senior expert advisor on global financial services at Ernst & Young (E&Y). "The problem is with the Banking Regulation Act and the RBI Act. These need to be amended to empower both the banks and the regulator. It will reduce the incidence of referring such cases to the court."
Till that happens, lenders will probably continue to tread cautiously on declaring cases of deliberate non-payment as wilful defaulting.
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WILFUL DEFAULTER A borrower is classified as a wilful defaulter in any of the following events:
Banks are advised to send their list of wilful defaulters to RBI, the Securities and Exchange Board of India and the Credit Information Bureau India. This is aimed at preventing wilful defaulters from accessing capital markets and borrowing money from other banks and financial institutions. The penal measures include the following:
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