RBI Guideliens On Wilful Default

Wilful Defaulters – RBI Guidelines for

Banks-By Rajesh Goyal


Who is A Wilful Defaulter :

 

A "wilful default" would be deemed to have occurred if any of the following events is noted:-

 

(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.

 

(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

 

(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

 

(d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.

 

 

Limit for Reporting Purposes :

 

The above indicates that there is no minimum amount to declare a borrower as willful defaulter.  However, for reporting purposes RBI has set certain limits.

 

(a)   All cases of wilful default (non-suit filed accounts) with outstanding of  Rs.25 lakh & above are required to be reported to RBI on quarterly basis as per the format given in the Master Circular on the subject;

 

(b)   All cases of willful default (suit filed accounts) with outstanding of Rs 25 lakh & above are required to be reported to CIBIL.    [It may also be mentioned here that banks also submit the  suit-filed accounts of Rs. 1 Crore and above to CIBIL i.e. the cases not categorized as willful defaults]

 

Both the above lists are also sent to SEBI so as to prevent the access to the capital markets by the willful defaulters.

 

Banks and FIs need not report cases where outstanding amount falls below Rs.25 lakh and cases where banks have agreed for a compromise settlement and the borrower has fully paid the compromised amount.

 

Banks and FIs are required to take suitable steps to report the names of current directors as also the directors who were associated with the company at the time the account was classified as defaulter to put other banks and FIs on guard. The names of independent and nominee directors are also be included with suitable distinguishing remarks as applicable.

Penal measures

 

The following measures are required to be initiated by the banks and FIs against the wilful defaulters as per RBI guidelines:

 

a) No additional facilities should be granted by any bank / FI to the listed wilful defaulters. In addition, the entrepreneurs / promoters of companies where banks / FIs 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 etc. for floating new ventures for a period of 5 years from the date the name of the wilful defaulter is published in the list of wilful defaulters by the RBI.

 

b) The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary.

 

c) Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the wilfully defaulting borrower unit.

 

d) A covenant in the loan agreements, with the companies in which the banks / notified FIs have significant stake, should be incorporated by the banks / FIs to the effect that the borrowing company should not induct a person who is a promoter or director on the Board of a company which has been identified as a wilful defaulter.

 

 

In Kotak Mahindra Bank Ltd v. Hindustan National Glass & Ind. Ltd. [2012]   Supreme Court has held that the Master Circular on willful defaults covers not only wilful defaults of dues by a borrower to the bank but also covers wilful defaults of dues by a client of the bank under other banking transactions such as bank guarantees and derivative transactions

 

 

Grievances Redressal Mechanism

 

Decisions to classify the borrower as wilful defaulter should be entrusted to a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs as

decided by the Board of the concerned bank/FI with a view to have more objectivity in identifying cases of wilful default.

 

The borrower should be suitably advised about the proposal to classify him as a wilful defaulter along with reasons therefore. He should be provided reasonable time (say 15 days) for making representation against such decision to a Grievance Redressal Committee headed by the CMD and consisting of two other senior officials.

 

He should also be given a hearing in case he represents that he has been wrongly classified as wilful defaulter and a final declaration as ‘wilful defaulter’ should be made after a view is taken by the Committee on the representation and the borrower should be suitably advised.

 

Govt, RBI ask banks to declare names of wilful defaulters quickly

Mahua Venkatesh, Hindustan Times  New Delhi, September 11, 2014

 

The government and the Reserve Bank of India (RBI) have asked banks to swiftly declare names of other wilful defaulters besides Vijay Mallya-promoted Kingfisher Airlines.

United Bank of India recently declared Kingfisher Airlines, Vijay Mallya and three directors on board wilful defaulters. State Bank of India has also sent a notice to tag them wilful defaulters. "We have already sent a notice to KFA (to declare it as wilful defaulter). There is a mandatory time that needs to be given to them to respond and that time is currently on," SBI chairperson Arundhati Bhattacharya had said.

"Banks cannot be keep on giving time to the wilful defaulters, they need to act swiftly," a senior finance ministry official said.

Banks, which have witnessed a surge in the level of non-performing assets (NPAs) - loans that do not yield returns - have also been asked to aggressively adopt the name and shame policy to make public the list of wilful defaulters.

In a notification issued on Tuesday, the RBI also said that guarantors, who refuse to fulfil their obligations to banks despite having adequate resources, will also be treated as wilful defaulters.

Besides UBI and SBI, another lender to the Kingfisher, Punjab National Bank, is also in the process of doing the same.

"NPAs have increased as the economy of the country has slowed down in the last two years… Besides, there are many people whose intentions are not good... they do not want to repay the loans," finance minister Arun Jaitley said last month.

The NPA level in government banks rose to 4.72%, or Rs. 2,16,729 crore, as on March 2014 against 3.84% in year-ago period.

The finance ministry is also looking to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 to ensure timely closures of cases and reduce the level bad assets

 

Sebi to release guidelines on wilful defaulters soon

Regulator might impose three-year ban on entities with wilful defaulter tag

The Securities and Exchange Board of India (Sebi) might soon announce guidelines for those labelled wilful defaulters by banks. According to people in the know, such entities might be barred from accessing the securities market for about three years.

The regulator might also release the framework for dealing with entities defaulting on bank loans soon, sources said.

“Sebi might deem wilful defaulters not ‘fit and proper’ from the perspective of accessing capital markets. The ban could be for a period of more than three years,” said a person privy to the matter.

An entity is declared a wilful defaulter by a lender if it defaults on loan repayments despite having the capacity to repay.

Also, entities that use the loan amount for purposes other than specified ones could be declared wilful defaulters.

The new framework will be applicable to those approaching the capital market for raising funds for the first time, as well as the listed companies and entities associated with it.

Sebi and the Reserve Bank of India (RBI) are also planning increased coordination to ensure wilful defaulters are kept away from financial markets. Currently, RBI shares data on wilful defaulters with Sebi, credit rating agencies and Credit Information Bureau of India Ltd on a quarterly basis.

“Work is underway on this front…we will like to go the RBI way on this... We can say ‘you (the wilful defaulter) cannot raise money from markets’,” Sebi Chairman U K Sinha said at a recent event. “There is a difference between a non-performing asset and a wilful defaulter...the bank has already come to a finding and the process has gone to a certain level before someone is called a wilful defaulter,” he had added.

Sebi acts against those towards whom adverse orders are passed by other regulatory authorities. Experts, however, say such action is limited to entities seeking to be market intermediaries; it doesn’t apply to promoters. They add the market regulator should make changes to the Securities Contracts and Regulations Act to act against promoter entities declared defaulters by authorities such as RBI.

Earlier this year, the central bank had proposed to Sebi that wilful defaulters be barred from raising funds through issuance of any securities in the capital market.

If Sebi expedited the implementation of the new framework, it could impact transactions awaiting regulatory clearances, experts said.