Decrypting The Wilful Defaulter Tag

Decrypting The Wilful Defaulter Tag

United Bank of India (UBI) declared Kingfisher Airlines, Mallya himself and three directors of the company – Subhash R Gupte, Ravi Nedungadi and Anil Kumar Ganguly – as wilful defaulters.

Kingfisher Airlines in July 2014 moved the Calcutta High Court, two months after the bank had in May 2014 identified it and Mallya as wilful defaulters. The court last week dismissed the plea, paving the way for UBI to declare the company and its chairman wilful defaulters.

Last Tuesday the Supreme Court on rejected a plea by Kingfisher Airlines against being declared a wilful defaulter, saying it has become infructuous as the Grievance Redressal Committee of Union Bank of India has already passed an order.

Wilful defaulter

A borrower is classified as a wilful defaulter in any of the following events:

  • When there is a default in repayment obligations by the unit (company/individual) to the lender even when it has the capacity to honour the said obligations. There is deliberate intention of not repaying the loan.
  • When the funds have been siphoned off and not been utilized for the purpose for which it was availed. Further, no assets are available which justify the usage of funds.
  • When the asset bought by the lenders funds has been sold off without the knowledge of the bank/lender.
  • The funds are not utilized for the specific purpose for which finance was availed but have been diverted for other purposes.
  • Further, in cases where a letter of comfort or guarantees furnished by group companies of wilfully defaulting units are not honoured when they are invoked by the lender, then such group companies are also considered to be wilful defaulters.

The decision to tag a borrower as a willful defaulter is the harshest step a bank can take upon any borrower.

Identifying and Declaring wilful defaulters

Bankers have an internal committee, headed by an executive director that examines cases of wilful defaults. The credit monitoring or recovery departments give their reports on borrowers deemed to have defaulted wilfully to this committee. The committee examines the efforts made by the bank to recover the dues, the repayment capacity of the borrower, end use of the funds before identifying an individual as wilful defaulter. The decision taken on classification of wilful defaulters is well documented and supported with evidence

Once a borrower is identified as a wilful defaulter, the bank sends him/her a notice with the reasons for the same. The borrower is generally given 15 days to make a representation against the decision to the grievance redressal committee. This committee is either headed by the chairman and managing director or by the executive director who is not part of the panel on identification of wilful defaulters. The bank declares a borrower wilful defaulter if he fails to offer a proper explanation or avoids the grievance redressal committee hearing repeatedly despite notices.

Banks also send their list of wilful defaulters to RBI, Securities and Exchange Board of India (Sebi) and Credit Information Bureau India (Cibil). This is aimed at preventing wilful defaulters from accessing capital markets and borrowing from other banks and financial institutions. The penal measures include the following:

  • No additional facilities will be granted to listed wilful defaulters by banks and financial institutions
  • Promoters of companies that have been identified for siphoning of funds, misrepresentation of accounts and fraudulent transactions will be debarred from institutional finance for floating new ventures for a period of five years
  • Legal process against wilful defaulters will be initiated. Lenders may initiate criminal proceedings also
  • Banks will adopt a proactive approach for a change of management of the willfully defaulting borrower unit.
  • Wilful defaulters will not be allowed to take up board positions in any company

Banks need not report cases

  • Where outstanding amount due is below Rs 25 lakh and
  • Where lenders/Banks have agreed for a compromise settlement and the borrower has fully paid the compromised amount.
ICRA: NPA’s of PSU banks to touch 4.6% in FY’15

ICRA: NPA’s of PSU banks to touch 4.6% in FY’15

ICRA an independent investment information and credit rating agency estimates that public sector bank’s gross non-performing assets (NPAs) to stand at up to 4.7 per cent at the end of this financial year, compared with 4.4 per cent at the end of FY14 it expects public sector banks’ gross NPAs to be at 4.4-4.7% as on March 31, 2015.

Fresh non-perfoming assets or NPAs of public sector banks are estimated to be at 3.5% of advances during the quarter ended June’14, according to a study by ratings firm Icra. Their gross NPAs increased by 20 basis points (bps) to 4.6% during the quarter. Asset quality of private sector banks too continued to remain under pressure as their NPAs also increased by 20 bps to 2.0% during the quarter.

However, there was a significant drop in the number of fresh cases of loans being refered to the corporate debt restructuring or CDR Cell for restructuring during the first of FY’15.

“The rate of generation of fresh NPAs remained elevated for public sector banks (3.5 per cent) and, as result, their gross NPAs increased by 20 basis points to 4.6 per cent in the first quarter of FY15. During the same quarter, the NPAs of private banks increased by 20 basis points to two per cent,”

– Icra.

The Icra study notes that the level of NPAs in the banking system gets understated as a sizeable amount of loans are sold to asset reconstruction companies or ARCs. It says that the gross NPA percentage would have been higher by 20-30 bps if there were no sales to ARCs . But sale of NPAs to ARCs is expected to decline in the rest of the current financial year ending March’15 as the Reserve Bank of India has prescribed that ARCs must invest and hold 15% in Security Receipts (SRs) as against 5% earlier.