Wilful defaulters a bane for the India growth story

There is one big challenge that has become a big headache and a major challenge for a developing country like India – the increasing gross NPA ratio along with a long list of wilful defaulters.

The regulators in the current regime are all geared up to upgrade the legal and financial machinery of the country and laws are being amended and updated on timely basis in this regard. But there is one big challenge that has become a big headache and a major challenge for a developing country like ours – the increasing gross NPA ratio along with a long list of wilful defaulters.

A few days ago RBI, for the first time, released a list of top 30 wilful defaulters. The list contained the names of usual suspects with Mehul Choksi's Geetanjali Gems topping the list, followed by REI Agro, Winsome Diamonds, Ruchi Soya, Rotomac Global, Kingfisher Airlines, Kudos Chemie, Zoom Developers, Deccan Chronicle and ABG Shipyard. The RBI's response to an RTI application came four years after the Supreme Court had first directed the central bank to disclose a list of India's wilful defaulters.

As per RBI Guidelines when a 'unit' fails to repay the loaned amount, it is termed as a defaulter. When this defaulter siphons off funds or tries to dispose of/remove the loaned security or doesn't pay the loaned amount back despite its ability to repay it, the unit is termed as a wilful defaulter.

As per a recently released data by PSBs of wilful defaulters on their books - defaulters in nationalized banks jumped by 60% to 8,582 in the last five years. The good part is that under the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, action has been initiated in 6,251 cases involving secured assets.

Further, banks are no longer sanctioning any further loans to such wilful defaulters. Additionally, Fugitive Economic Offenders Act, 2018, was enacted for effective action against wilful defaulters fleeing Indian jurisdiction. In this Act, the property of fugitive offenders will be confiscated, and the offender will be disentitled from defending any civil claim.

RBI has also debarred such wilful defaulters and companies with disobedient borrowers from accessing capital markets to raise funds or participate in the insolvency resolution process. Bank chiefs can also authorize look-out notices for defaulters to prevent them from leaving the country. The government has also advised public sector banks to decide on publishing photographs of wilful defaulters as well as to obtain a certified copy of the passport of promoters/directors and other authorized signatories of companies availing loans of more than ₹50 crores.

The Supreme Court in the recent case of Bikram Chatterji v. Union of India termed diversion of funds as a serious fraud. Penal provisions include that no additional facilities be granted by any bank/FI to the listed wilful defaulters. In addition, such companies (including their entrepreneurs/promoters) where banks/FIs have identified siphoning/diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from scheduled commercial banks, financial institutions, NBFCs, for floating new ventures for a period of 5 years from the date of removal of their name from the list of wilful defaulters as published/disseminated by RBI/CICs. Also, the banks/FIs can initiate legal actions including criminal proceedings, against the borrowers/guarantors.

Many banks and financial institutions have increasingly been taking up for the initiation of insolvency and bankruptcy proceedings against companies defaulting in loan payments. Further, SEBI has mandated that in case of any default in repayment of loans from banks and financial institutions, beyond 30 days of pre-agreed payment date, listed companies will have to disclose the default within 24 hours of the 30^th day. The disclosures have to be made to the stock exchanges when the entity makes a default in payment of interest/installment obligations on loans, including revolving facilities like cash credit, from banks/financial institutions and unlisted debt securities.

Only strong measures such as above and others can contain the menace of wilful defaulters which is impeding and hurting the growth of the fast-growing Indian economy.

(Disclaimer: The opinions expressed are the personal views of the author. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)