Commercial banks growing bad loans is the current headache of RBI governor. However, he intends to distinguish between willful defaulters and non-willful defaulters when it comes to revealing the names of bank loan defaulters.
Mr. Rajan, RBI governor, is of the opinion that due to an economic slowdown or management problems, defaults may occur several times during an organization’s course of operation. The organization doesn’t have control over these factors. That’s why RBI is not in favor of embracing such defaulter publicly.
What needs more attention is the issue of willful defaulters, broadly taken as individuals and companies who are able yet are unwilling to repay their debt. Getting money back from them is like a never ending legal battle for the lenders.
As per RBI’s guideline, commercial banks and registered financial institutions (FIs) should call any debtor willful defaulter when
- A person or institution defaults a loan despite possessing the capacity to repay it.
- A debtor takes a loan for one purpose and uses it for others and at the end, doesn’t repay it.
- A debtor takes a loan for one purpose and uses it for another purpose such a way that it is not available to him in any other form.
- A debtor removes or disposes of the collateral used for securing a loan without informing the lender/bank.
All the banks and FIs should from now on follow these guidelines to identify and report the willful defaulters. They can be individuals as well as business entities. In the case of enterprises, the persons responsible for managing the business will be regarded as the willful defaulters. However, before reporting a single company within a defaulting group as a willful defaulter, its previous loan repayment history must be taken into account.
Banks/FIs are allowed to call also a guarantor willful defaulter if he/she has the means to repay the debt amount of the principal debtor but doesn’t do that willingly. However, this definition applies only to the guarantees taken after the issuance of the master circular, i.e. after 09.09.2014. Guarantees taken prior to that are exempted from this treatment.
A defaulter is called willful defaulter only when he has an outstanding amount of 25 lakh or above. For such defaulters, the RBI has also stipulated penalties.
- The defaulter should not get any facilities from banks/FIs. Additionally, there will be a ban on availing institutional credit.
- The lending institute may interfere to alter the management authority of the defaulting company.
- The lender may take legal actions.
- The defaulter should not be allowed to enter into any new venture for the next 5 years from the date he/she is declared as willful defaulter.
Willful defaulters are in many ways different from normal defaulters. They mostly enjoy high social and economic power but create more serious problems for the economy. It makes every sense to identify them and to give them a tough treatment in order to improve Indian banks’ financial health. Check out here what Mr. Rajan has in mind.