MAY 06, 2016

By TIOL Edit Team

The Wilful defaulter 'name and shame' strategy originally devised to curb defaults by borrowers who have the capacity to repay but not the willingness, is turning out to be toothless. On the contrary, the same is only bringing more embarrassment for the Govt. of India. The subjects of wilful default and non productive assets (NPAs) have acquired the central theme of debate and discussion in the Parliament like never before. The reasons are quite obvious. With staggering statistics surfacing every now and then, it only compels us to pose questions at the very functioning of the Indian banking sector. When questions were hurled at the Govt. on the demonic rising graph of wilful defaults, this week, the Minister of State for Finance Mr. Jayant Sinha had to go on record in a written reply addressing the Rajya Sabha disclosing frightening statistics. The MoS stated that there were 7,686 wilful defaulters owing Rs 66,190 crore to public sector banks (PSBs) as on December 31, 2015. He also added the total outstanding amount in top 100 non-performing accounts (NPAs) was Rs 1.73 lakh crores as on December 2015. The reply also reveals that the number of wilful defaulters of PSBs has hiked from 5,554 to 7,686 in three years while the amount involved has more than doubled to Rs 66,190 crore from 27,749 crore. The Minister also disclosed that the total exposure of top 50 defaulters of PSBs as on December 2015 was Rs 1,21,832 crore.

The scheme of wilful defaulter derives its legitimacy from the RBI's Master Circular on wilful defaulters. It defines wilful defaulter as a borrower who has the ability but not the willingness to repay the loan. In other words, the borrower refuses to repay with a mala fide intention which can be achieved through combination of measures, e.g., underreporting its true financial position, diverting the loan towards a purpose in breach of the loan agreement, etc. One may argue that wilful default is just a part of the macro problem of NPAs, but certainly cannot deny the fact that it is a major contributor towards it.  Theoretically, once a borrower is declared as wilful defaulter, all the channels of funding through banks and financial institutions are cut off for a duration of 5 years. All directors whether executive or non executive are also subject to this prohibition in their personal capacity. RBI also collaborated with the SEBI and now these companies would also be ostracized from accessing the capital market and the directors of such defaulting companies are not allowed to assume directorship in any listed company. Sounds deterrent enough, yet the results are not what we expected.

The basic intention behind the wilful defaulter scheme was to exert pressure on the defaulting borrowers by cutting all supply lines of finance and creating social stigma. Unfortunately this has not happened. Sadly, the tag of being branded as wilful defaulter is almost acquiring the status of cult with Dr. Vijay Mallya leading the way for the other top shot businessmen in India. What else one would decipher from audacious statements made by persons like Vijay Mallya when he commented that if he is arrested, the nation will not get to see a single penny. This is nothing but straightaway looking into the eyes of the law and challenging it without any fear for the repercussions. And the list is long with several other players who have brazenly diverted funds, engaged in botched up business ventures and refused to repay the loans. Therefore, the regulators and policy makers should now shift the discourse from naming and shaming game to devising strategies to make these recalcitrant cough up the borrowed loans. Even if one borrower is made to do so, it can be expected that others will follow. And only then we can set a true and palpable deterrent effect for the business houses. For achieving this, severe structural and implementation level changes are warranted.

First, forensic audit must be made compulsory for wilful defaults besides applying this tool for NPAs and bad loans. Infact, at the very first instance of loan default, forensic audit must be triggered. The aim is simple - nip in the bud. The RBI must act promptly and finalize the necessary guidelines to start this process at the earliest. Secondly, change in management i.e., the present management of the wilful defaulters must be taken over by the financial institutions. While such provision exists in the SARFAESI Act, 2002 but it is hardly exercised. Thirdly, India should contemplate bilateral treaties where it can confiscate foreign assets of wilful defaulters. Fourthly, the banks have been long playing the excuse of victimhood, but the fact is that they also have a contributory role in this mess. There are umpteen instances where the banks have shown lackadaisical approach in initiating the recovery proceedings. India is yet to deal with its bankers whenever they have shown utter disregard for sufficient diligence before sanctioning the loans in lieu of over ambitious profitability. The entire episode of Kingfisher Airlines is a classic instance of aggressive lending based on over inflated brands given as collaterals. In case of Zoom Developers which has been branded as a wilful defaulter, investigation has revealed that banks have allowed lenders to issue bank guarantees without due diligence and further allowed these bank guarantees to roll over. The value of bank guarantees was Rs 3,000 crore, while the collateral with them was only Rs 150 crore. In other words, this calls for a comprehensive scheme of lenders liability for plugging these gaping cracks in banking lending business. Finally, isn't the time propitious to call for a debate to criminalize wilful defaults?

These intimidating astronomical figures disclosed by the MoS in the Rajya Sabha gives out only one signal - the situation is grim. Some experts have opined that the Indian banking sector could be moving towards a systemic crisis and, therefore, it's time to move beyond the comforts of the age old adage "Too big to fail" and acknowledge the ground realities before the situation becomes irreversible. It would be extremely naive on our part to expect a solution from the ongoing judicial intervention where the Supreme Court is constantly rebuking RBI for its failure to maintain transparency. While this was much needed, but the lasting solution lies in overhauling the existing system brick by brick. The much awaited Bankruptcy Code, 2015 has received the go-ahead from the Lok Sabha. Let's hope this turns out to be the game changer to check the sky rocketing graph of wilful defaulters.