The government plans punitive action including a ban on floating new ventures and, in extreme cases, pressing of criminal charges against deliberate non-payment. HT explains:
Who is a wilful defaulter?
Wilful defaulters are borrowers who have not repaid bank loans of more than Rs. 25 lakh despite having the capacity to do so, who divert funds to projects other than those for which the loan was availed and who sell off assets that were pledged to get loans without knowledge of the banks.
Why have banks decided to get tough on such borrowers?
Saddled with rising bad debt, banks are moving to press criminal charges and even shame such borrowers by publishing their photographs in newspaper advertisements.
What is at stake?
As on March 31, 2014 nearly Rs. 48,464 crore funds are locked up with individuals or firms that have “wilfully” decided not to pay back loans. Some of them have even sold off assets pledged to get loans without informing the banks.
What’s the government?
The government has asked chairmen of the public sector banks to tackle bad loans by devising “suitable strategies.” Under the new rules, even defaulters who have agreed to a one-time settlement will not be able to escape criminal charges, although they will be freed of civil ones.
How is the data on wilful defaulters collated?
Manmohan Singh, the then finance minister in his budget speech on February 28, 1994, had put banks and financial institutions (FIs) on guard against borrowers who have defaulted in their dues. He had said the Reserve Bank of India (RBI) was putting in place arrangements for circulating among banks and FIs names of defaulting borrowers above a threshold limit. He further mentioned that the RBI would also publish a list of defaulting borrowers in cases where suits have been filed by banks and FIs.
Accordingly, RBI prepared a scheme to collect and disseminate information on defaulters of Rs. 1 crore or more.
What are features of this scheme to disseminate information on defaulters?
Salient features are: banks and FIs need to submit twice a year to the RBI, details of loan accounts of Rs. 1 crore or more that have been classified as doubtful, in a prescribed format, as on March 31 and September 30. This data is circulated in a consolidated form by RBI to the banks and FIs. It is the responsibility of the banks and FIs to ensure accuracy of their data.
What does one-time settlement mean in banking parlance?
Banks enter into OTS with chronic defaulters to recover bad loans. In such settlements, they forgo interest and even part of the principal amount, depending on the loan profile.
What is hypothecation?
Hypothecation is a transaction where a person borrows money from a lender against a security of a movable asset. The security belongs to the borrower and remains in his possession during the repayment period. If the borrower fails to repay the loan, the financier can claim the hypothecated asset after obtaining court order.
How have banks been moving against chronic defaulters?
The RBI has progressively been tightening norms for bank financing of wilful defaulters. In 2008, it had asked banks and financial institutions not to extend loans to promoters and entrepreneurs who have siphoned off funds or falsified accounts for five years to start new ventures.
Wilful defaulters face a financial ban as banks do not lend to them. Such borrowers are barred from being appointed as directors on boards of companies. The five-year ban kicks in from the date the promoter’s name is included in the list of wilful defaulters, put out by RBI.