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Wilful Defaulters Feel the Heat

Banks are training their guns on overdue borrowers who can pay, but won't. Punitive measures will include a ban on floating new ventures, and, in extreme cases, pressing of criminal charges. HT takes a look.

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's at stake?

As on March 31, 2012 nearly Rs. 60,000 crore funds are locked up with individuals or firms that have "wilfully" decided not to pay back
loans. Some to them have even sold off assets pledged to get loans without informing the banks.

What's the government's view on this?

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 that the 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, the RBI prepared a scheme to collect and disseminate information on defaulters of R1 crore and above.

What are features of this scheme to disseminate information on defaulters?

The salient features of the scheme, as modified from time to time, are: banks and FIs are required to submit in prescribed format to the RBI as on March 31 and September 30 every year the details of the loan accounts of Rs. 1 crore or above which have been classified as doubtful. The data on defaulters received from banks and FIs 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 a one-time settlement (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 the meaning of the term 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 then claim the hypothecated asset, after obtaining a court order.

How have banks been moving in on against such chronic defaulters?

The Reserve Bank of India (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 the RBI.

What are banks planning to recover money from wilful defaulters?

Banks say they are open to the idea of making public the list of chronic defaulters. Under the law, banks are required to refer all loan defaults worth at least Rs. 1 crore to CBI.

According to data on the Credit Information Bureau (India) Ltd's (CIBIL's) website, commercial banks, as on March 31, 2012, have filed suits against 7,370 accounts (classified as wilful defaulters) with loan defaults of amounts above Rs. 1 crore. The total value of such defaults is placed at Rs. 58,566 crore.

Bankers say that the move to press for criminal proceedings and make the names of wilful defaulters public will put such borrowers on high alert.

Hindustan Times, New Delhi, 13-03-2013