Mumbai: The Reserve Bank of India (RBI) has turned down banks’ plea for more time to brand a dodgy borrower as ‘wilful defaulter’ – a client who diverts borrowed funds or refuses to repay loans despite having the wherewithal to do so.
About a fortnight ago, the regulator told the industry that the decision to classify a wilful defaulter must be completed within six months. It is felt that giving a long time to errant borrowers for putting across their point runs the risk of bringing down the value of the assets, said a person aware of the communication from RBI.
Banks stick to a well-defined process laid down by the central bank before categorising a borrower as wilful defaulter – thanks to the stigma attached to the tag, the naming and shaming that follows, the impact on the borrower’s businesses with most institutional lenders shutting their doors, and court feuds that could be triggered.
A borrower is given the opportunity to tell their side of the story under the mechanism followed by banks after an account turns ‘non-performing asset’ – where the loan interest or principal or both is overdue for more than 90 days – and bank officials concerned internally red-flag the client as a ‘wilful defaulter’. Here, the borrower is given a personal hearing to present its case.
However, over the years bankers have experienced that such borrowers can often be slippery and elusive, dragging their feet to deliberately delay and derail the process. Under the circumstances, banks felt that completing the process while minimising the chances of a borrower taking a legal recourse could take a year after the loan account is listed as an NPA.
“However, RBI has made it clear that the process must be over by six months. I think the regulator thinks that otherwise, it would defeat the purpose,” said another person. “Wilful defaulter is a sensitive, often political, issue. Banks must initiate criminal proceedings and some borrowers can be a flight risk,” he said.
The elaborate process that culminates in naming a borrower as wilful defaulter begins with the ‘identification committee’, an internal panel of a bank, examining the case referred to them by the bank’s officials who suspect the default to be wilful in nature. If the committee, comprising a whole-time director (other than the managing director and CEO) shares the suspicion, the matter is referred to the ‘review committee’ having the bank’s CEO and two independent or non-executive directors as members.
After giving the promoter and senior management members of the borrowing company to explain themselves, the review committee would pass a ‘reasoned order’ which is communicated to the borrower. During the personal hearing, the director or CEO of the borrowing company cannot be accompanied by a lawyer. If the borrower is unwilling to avail the opportunity, the review committee would assess the facts, the views of the identification committee, and the borrower’s written representation (if any) to arrive at a decision.
Borrowers who sell off assets or avoid chipping in the promised equity despite having the capacity may also be identified as wilful defaulters. Besides direct borrowers, the definition also covers guarantors (of loans) who, despite having the funds, fail to pay on invocation of a guarantee.
According to the RBI’s June ’24 Master Circular on the subject, banks may have a “non-discriminatory board-approved policy that clearly sets out the criteria based on which the photographs of persons classified and declared as wilful defaulter shall be published.”
Once a bank alerts the credit information bureaus about its decision to name a company as wilful defaulter, the information can be obtained by other lenders and institutions who are members of these bureaus.
