The Reserve Bank of India (RBI) has defined the term ‘wilful defaulter’ as one who has not utilised bank funds towards the purpose for which they were taken, and who, despite having adequate liquidity, has failed to repay his personal loans. This definition has paved the way for banks to acquire the assets of companies that default, through the Securitisation Ordinance, and thereby reduce the companies’ non-performing assets (NPA) quickly.
In greater detail, a wilful default is deemed to have taken place if any of the following events occur:
- · The unit defaults in fulfilling its payment / repayment liabilities to the lender, despite having the capacity to do so.
- · The unit not only defaults in fulfilling its payment / repayment liabilities, but also diverts the funds borrowed from the lender towards other purposes, instead of using it for the specific purpose(s) for which the finance was availed of.
- · The unit defaults in fulfilling its payment / repayment liabilities to the lender, and also removes / disposes the lender’s immovable property or movable fixed assets to secure a personal loan without the lender’s knowledge.
- · The unit defaults in fulfilling its payment / repayment liabilities to the lender, and siphons off the funds towards purposes other than the ones specified while borrowing. Further, the funds are unavailable with the unit even in the form of other assets.
However, it is only fair that the wilful default identification be made bearing in mind the borrowers’ track record, instead of basing it on isolated incidents / transactions. To qualify as a true wilful default, the default must be deliberate, calculated, and totally intentional.
Note: ‘Unit’ includes individuals, juristic people and all other kinds of business enterprises – regardless of whether they are incorporated. For business enterprises other than companies, banks or financial institutions may also report the names of the people responsible for the business enterprise’s management of affairs.
The below mentioned penal measures can be taken by financial institutions and banks against wilful defaulters:
Financial institutions and banks should not grant any additional facilities to the listed wilful defaulters.
Further, all such companies, inclusive of their promoters and/or entrepreneurs, wherein financial institutions/banks have recognised diversion or siphoning of funds, fraudulent transactions, misrepresentation, and falsification of accounts, should be debarred from obtaining institutional finance from financial institutions, scheduled commercial banks, and NBFC’s for the purpose of floating new ventures. This holds valid for a period of five years from the date since their names are removed from the list of wilful defaulters as disseminated / published by RBI/CICs.
Wherever warranted, the legal process against the guarantors / borrowers and the foreclosure for dues recovery should be initiated promptly. Lenders also reserve the right to start criminal proceedings against wilful defaulters, if necessary.
Financial institutions and banks must be proactive in changing the management of the wilfully defaulting borrowing unit at the earliest, wherever possible.
In the loan agreement between the financial institutions/banks and the companies to which the funded or non-funded credit facility has been provided by the former, a covenant must be incorporated to the effect that the borrowing company must not take on its board any person who is in the Wilful Defaulters list. In the event that such a defaulter is found on the company’s board, immediate and strict action would be taken for the removal of the person there from.
It would be mandatory for financial institutions and banks to have a transparent mechanism for this entire process, in order to ensure that the penal provisions are not misused under any circumstances. Also, the scope of these discretionary powers must be kept to the minimum. It is also critical to ensure that an isolated or solitary instance is not used as the foundation for imposing such a penal action.
Individuals, group companies, and non-group companies may furnish guarantees. In the instance of dealing with the wilful default of an individual borrowing company in a group, financial institutions/banks must take into consideration the individual company’s track record, while also looking at the company’s overall repayment performance towards its lenders.
Nonetheless, where the guarantees furnished by the companies within the group on the wilfully defaulting unit’s behalf are dishonoured when invoked by financial institutions and/or banks, these group companies are also deemed as wilful defaulters.
All wilful defaulters along with any associated promoters involved in the siphoning or diversion of funds would have to bear the specific penal measures.
Bearing in mind the current Rs. 25 lakhs limit fixed by the Central Vigilance Commission for financial institutions or banks to report wilful default cases to the RBI, any wilful defaulter having an outstanding balance of Rs. 25 lakhs and above, will attract the stipulated penal measures. This Rs. 25 lakhs limit is also applicable in order to take note of the funds siphoning or diversion instances.
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