Concept of willful defaulter

RBI has defined the 'willful default' to occur if the 'unit' has, inter-alia, defaulted in meeting its payment obligations or not utilized the finance from the lender for the specific purposes for which finance was availed or has siphoned off the funds. 

Further, RBI has defined the term 'unit' to include individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. In case of business enterprises (other than companies), banks / financial institutions may also report (in the Director column) the names of those persons who are in charge and responsible for the management of the affairs of the business enterprise.

Hence willful defaulter is when there is:

a) Default in repayment obligations by the unit to the lender even when it has the capacity to honour the said obligations. 

b) Default in repayment obligations by the unit to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. 

c) Default in repayment obligations by the unit to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets. 

d) Default in repayment obligations by the unit to the lender and has also disposed off or removed the movable fixed assets or immovable property given by it for the purpose of securing a term loan without the knowledge of the bank/lender. 

How willful defaulters are affecting the economy?

The economy is facing the issue of Non-Performing Assets (NPAs) in Banking Sector especially in case of Public Sector Banks (PSBs). NPA is an asset, including a leased asset, becomes non¬-performing when it ceases to generate income for the bank. In these NPAs there are two categories of defaulters:

a) Those who are unable to pay back due to economic slowdown both in domestic and global market and other reasons outside their control.

b) Willful defaulters.

PSB’s NPAs have touched a whopping Rs 3.69 lakh crore by 2015. Of this, willful defaulters owe public sector banks Rs 64,335 crore, which constitutes about 21 per cent of total NPAs. If government is able to recover the default amount by such willful defaulters or restrict them for future, it could easily finance government’s MNREGA and health expenditure and other social sectors out of that amount.

Government initiatives

The Government has taken various measures to deal with both these categories of defaulters. 

• In order to deal with default due to economic slowdown, the Government has taken various measures to revive the stressed sectors which mainly include steel, textiles, power and roads among others. 

• The Government has also done recapitalization of banks by providing Rs. 25,000 crore in the last year Union Budget 2015-16 as well as in this year’s budget 2016-17.

• Transparency and professionalism has been brought in appointment process for top management positions in the PSBs including Chairmen and Managing Directors. 

• The Government has taken various measures to make the management professional, has given full autonomy to the banks in taking commercial decisions without any interference from the Government. 

• Bankruptcy Law has been cleared by the Parliament. 

• The SARFAESI Act and DRT Act have been amended to make the recovery process more efficient and expedient. Wherever it was observed that number of cases in which action taken by the banks against guarantors for recovery of defaulted loans is insufficient, the Government has advised the banks to take action against guarantors in the event of default by borrowers under relevant Sections of SARFAESI Act, Indian Contract Act and RDDB & FI Act. 

• A number of other steps have been taken by the Government and Reserve Bank of India. Government has decided to establish six new Debt Recovery Tribunals (DRTs), to speed up the recovery of bad loans of the banking sector. In addition, the Government has advised Public Sector Banks (PSBs) to constitute a Board level Committee for monitoring of recovery and to increase the pace of recovery and manage NPAs. 

Impact on a company declared as a willful defaulter?

Being a willful defaulter means that the individual or company can attract certain penal measures. Banks and institutions are required to submit the list of suit-filed accounts of willful defaulters at the end of every quarter to the Credit Information Bureau (India) Ltd (CIBIL).Banks also report the names of current directors as well as directors who were associated with the company at the time the account was classified as defaulter. This helps to put other banks and institution on guard against such individuals. This list can also include independent and nominee directors. The worst thing that can happen if one is labeled a willful defaulter is it pretty much chokes off most credit channels since no additional lending facility is available from any bank or institution. Also, it shuts the door on any new ventures — a willful defaulter is not permitted to float any new business for a period of five years from the date of being declared a willful defaulter. Lenders are also expected to initiate legal process, which can include criminal proceedings if necessary, against the borrowers/guarantors and foreclosure of recovery of dues is expedited. But most importantly, banks and institutions have been given the right to change the management of willfully defaulting company.

There is need for bringing more transparency in the system and list of all the defaulters whose loans have been written off by the PSBs is made public.  Exemplary action against the willful defaulters may be taken so that others do not indulge in similar activities. 

According to RBI, penal measures are applicable to a defaulter with an outstanding balance of over Rs. 25 lakh.