While the common borrowers are struggling to repay equated monthly instalments (EMIs) of their loans, wilful defaulters seem to not only go scot-free but also live their life king-size without any worry or fear of any action due to banks, especially the public sector banks (PSBs), turning a blind eye on these lapses.
Recently, the Reserve Bank of India (RBI) in an application filed under the Right to Information (RTI) Act, revealed the recent statistics on wilful defaulters. The information shared by RBI reveals that 264 wilful defaulters defaulted on loans of over Rs. 100 crore. There are 34 wilful defaulters who owe between Rs. 500 crore to Rs. 1,000 crore to Indian banks and their total outstanding is at a whopping Rs 22,105 crore. In the interest of better context, this amounts to a little over 3 billion dollars, which -
- amounts to the total debt raised by Robinhood to recover from the recent debacle with Reddit users over GameStop stock
- is the lifetime earnings of Tencent's PubG
- is higher than the aid amount India received from the World Bank to fight Covid-19 (India received $2.5 billion)
The number of wilful defaulters had been on the rise even before the lockdown was announced in March. As per the March quarter data from TransUnion Cibil, lenders had filed 1,251 cases to recover Rs. 24,765.5 crore. The numbers are released with a lag. Not all lenders update their details with the same frequency. Mehul Choksi's scam-hit company has topped the list, among other defaulters including Gitanjali Gems Ltd, which owed Rs. 5,747.05 crore, besides other group companies, Gili India Ltd and Nakshatra Brands Ltd, which had taken loans of Rs. 1,446 crore and Rs. 1,109.16 crore, respectively. The popular case of Vija Mallya’s defection comes to mind, wherein every news channel flashed the headline, ‘PNB declares UB as Wilful Defaulters”.
Reading this leaves us with a few pertinent questions. Who is a Wilful defaulter? In what circumstances does the default become wilful? Who has the authority to label a corporation or an individual as a wilful defaulter?
The Reserve Bank of India (RBI) in 1999 had differentiated between ''wilful'' and ''non-wilful'' defaulters. The differentiation was made to delineate those who were deliberately using the banking system to defer paying back dues from those who genuinely fell into the debt trap. Wilful defaulters are considered as entities that do not pay back money despite the ability to do so. The concept of 'Wilful Defaulter' was introduced back when the Reserve Bank of India (RBI) (in order to curtail the increasing menace of Non-Performing Assets (NPAs) of the Banks), as per its power under Sections 21 and 35A of the Banking Regulation Act, 1949, issued the Master Circular which defined Wilful Defaulter and detailed the measures to be adopted by the Banks and Financial Institutions (FIs) to adjudge the instances of default i.e. whether the same is a wilful default or not. As per the Master Circular issued by RBI (under the Banking Regulation Act, 1949), a borrower is a Wilful Defaulter when he does not meet his obligations even when he can do so; does not utilize funds for the specific purpose they were availed, nor has it in another form of assets, siphons the funds, disposes of the property or assets which were given for securing the loan without the knowledge of the lender, misrepresents and falsifies reports and fraudulent transactions.
A person or a company is termed as a “wilful defaulter” in any of the four circumstances given below:
- When the borrower (individual or company) defaults on their payment obligation, even when it has the capacity to honor the said obligations. There is a deliberate intention of not repaying the loan.
- When the funds are not utilized for the specific purpose for which finance was availed but the borrower is found to have diverted the availed funds for a purpose other than what was defined in the loan agreement.
- When the funds are suspected to be siphoned off by the borrower and have not been used for the purpose which it was borrowed. Further, no assets are available which justify the usage of such funds.
- When the funds acquired by the buyer/ lender have been sold off without the knowledge of the bank/lender.
Further, where a letter of comfort or guarantees furnished by a group companies of wilfully defaulting units are not honored when they are invoked by the lender, then such group companies are also considered to be wilful defaulters. Various safeguards have been instituted into the laws for dealing with wilful defaulters, some of them are:
- Under the Banking Regulation Amendment Act, 2017 – The RBI can issue directions to banks for resolution of stressed assets. Further, the RBI can specify authorities or committees to advise these banks on the resolution of stressed assets. The members on these committees will be approved and/or appointed by the RBI.
- The SARFAESI Act, 2002 was amended to include three months of imprisonment in case the borrower does not provide asset details, and for the lender getting the possession of the mortgaged property in 30 days.
- Companies Act, 2013 – Section 447 and 448 would be applicable to wilful defaulters. S. 447 says someone found guilty of fraud shall be punishable with imprisonment of six months which can extend up to ten years, or with a fine three times more than the amount involved in the fraud or with both. S. 448 gives out punishment for false statements.
- Indian Penal Code, 1860 – A wilful defaulter can be prosecuted under Section 415 and 403 of the IPC. Criminal action is usually initiated by the financial institutions under these sections only. Section 403 typically deals with the dishonest misappropriation of property which states that a person who has been held liable for this offense shall be punished with imprisonment for a term which may extend to two years or with fine, or with both. Further, section 415 addresses the offense of cheating.
- Fugitive Economic Offenders Act, 2018 – This legislation was mainly passed to bring about a comprehensive new framework to deal with such a problem. On reading the preamble of the Act, it can be asserted that the Act’s main objective is to punish the ‘fugitive economic offenders’ to face the law and it is done through the attachment and consequent disposal of property.
- Further, SEBI disallows wilful defaulters from boards and they are restricted from raising capital and from being involved in capital market activities.
- Under Insolvency and Bankruptcy Code, 2016 the creditor-in saddle approach is presented, wherein the interim resolution professional takes over the management of the affairs of the company. The Insolvency and Bankruptcy Code, 2016 has debarred wilful defaulters from participating in the insolvency resolution process.
Also, as per Section 29A of IBC, a person becomes ineligible to become a resolution applicant, if such person, or any other person acting jointly or in concert with such person is a Wilful Defaulter in accordance with the guidelines of the Reserve Bank of India issued under the Banking Regulation Act, 1949 (10 of 1949).
RBI requires the Bank/FI to adhere to the prescribed procedure for labeling a borrower as a wilful defaulter and the order identifying the borrower as a wilful defaulter must be informed. The Hon’ble High Court of Calcutta in the case of Santanu Ghosh and Ors. v. The State Bank of India and Ors. has observed that the consequences of a borrower being labeled a wilful defaulter are grave and the borrower, if labeled as wilful defaulter, would not qualify thereafter to obtain any credit facilities from said Bank/FI. The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary.
The evidence of wilful default on the part of the borrowing company and its promoter /whole-time director at the relevant time would have to be examined by a Committee headed by an Executive Director, or equivalent, and consisting of two other senior officers of the rank of GM / DGM. If the Committee concludes that an event of wilful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter / whole-time director and call for their submissions. After considering their submissions, the Committee issues an order recording the fact of wilful default and the reasons for the same. An opportunity should be given to the borrower and the promoter / whole-time director for a personal hearing if the Committee feels such an opportunity is necessary. The order of the Committee should then be reviewed by another Committee headed by the Chairman / Chairman & Managing Director, or the Managing Director & Chief Executive Officer / CEOs and consisting, in addition, to two independent directors / non-executive directors of the bank. The Order shall become final only after it is confirmed by the said Review Committee.
Calcutta High Court in a recent decision of Sandip Kumar Bajaj & Anr. v. State Bank of India & Anr. observed that it is clear from a reading of section 14(3)(b) that, the prohibition on institution or continuation of suits and other proceedings against the corporate debtor does not extend to a surety. It is undisputed that both the petitioners are erstwhile guarantors of the Company, namely, the corporate debtor. Section 29-A or 31 would provide a shield against the operation of section 14(3)(b) and that the petitioners would come under the immunity blanket of section 14 is contrary to the law governing insolvency resolution process and the RBI guidelines for dealing with wilful defaults of corporate entities.
The Insolvency and Bankruptcy Code, 2016 lays down the complete process for individuals and companies to resolve insolvency in a maximum of 180 days time period (can be extended to another 90 days only in exceptional cases), which is to be conducted by the experts defined under the Code as ''Insolvency Professionals''. It is important to put an end to time-consuming and overlapping jurisdictional issues due to the presence of multiple forums and establish a single window to deal expeditiously with the matters of insolvency. The increase in cases of wilful default is not only because there is no effective legal recourse available with the lenders. It has been observed that Indian Banks and FIs follow a uniform set of guidelines and rules for lending to every project and sector. This needs to change and the lending mechanism should be customized as per the project requirements and only after evaluating the peculiarities of that particular sector.
It is pertinent to point out that it is not enough to have such strict rules as laid down by the RBI because sometimes the default may be due to circumstances beyond the borrower’s control. It is critical to evaluate the risk associated with the project before lending and develop lending after a deep study of the project, sector, and borrower. A diligence exercise puts you in a better position to negotiate with vendors, onboard vendors quickly, and ensure that your project is successful without exposing your business to avoidable risks. To know more on it we recommend you read:
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