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Increase In Number Of ‘Wilful Defaulters’

Published on Thu, Sep 18,2014 | 13:30, Updated at Thu, Sep 18 at 13:30Source : 

By: Dina Wadia, Partner - JSA

The issue of wilful defaulters has recently become a hot topic in the media mainly due to the high profile Kingfisher Airlines and its flamboyant promoter, Dr. Vijay Mallya (along with three other directors) being declared as wilful defaulters by the United Bank of India. This has turned the spot light on the ability of banks to use this powerful weapon in cases where the default is found to be intentional, deliberate and calculated. The regulatory regime, which is contained in the RBI’s Master Circular on Wilful Defaulters (Master Circular), and enables banks to declare a borrower unit and its promoters/directors and group company guarantors as wilful defaulters, has been around for sometime. Banks have been making declarations of defaulters and reporting to the RBI and CIBIL. Though the RBI data is not publicly available, all indications are that there has been a steady increase in the number of wilful defaulters over the past few years. The reasons for this are not too hard to fathom; a decline in asset quality, the effects of economic slowdown, delays in project implementation leading to rising NPA’s and pressure on the Banks to take proactive steps to recover their dues.

What then, one may ask, has suddenly changed?

In recent weeks, one can sense a new mood at the RBI and in the government. The RBI is closely monitoring the bad loans in the banking sector as well as the lists of large defaulters. Within the last week itself there have been two significant developments. Firstly, on 9th September RBI issued clarifications to the Master Circular. Most significant of these was that the existing provision relating to group company guarantors was extended to individuals and non-group corporates. It was further clarified that, as the liability of the guarantor is in law co-terminous with that of the principal debtor, the banks could proceed against the guarantors simultaneously. This is virtually a directive to the banks to take action against defaulting borrowers and their guarantors simultaneously. The prevailing practice was to proceed against the guarantors only after exhausting the remedies against the borrower which led to delays. The Reserve Bank has also clarified that this will only apply to guarantees given after the date of the clarification.

The extension to individuals and non-group corporates and the ability to proceed simultaneously against both the defaulting unit and its guarantors is significant given that the consequences of being declared wilful defaulters are quite draconian. Access to institutional finance is blocked, the promoters/directors who are declared as wilful defaulters are not able to undertake any fresh ventures using bank funds for five years and their presence as directors on boards of companies will become toxic. The contagion could also spread to non-group companies and individuals thereby having a cascading effect. The RBI is also working with SEBI to share information on defaulters on a real time basis and to block access to the capital markets.

The other development is the recent judgement of the Gujarat High Court in Iconic Metallics Vs. Union of India where the Court upheld the validity of the Master Circular but struck down the part of as was applicable to all directors alike. The judgement is timely as there were rumours of moves by some defaulters to challenge the constitutional validity of the Master Circular.   While it is eminently arguable that the Master Circular does not envisage all directors as being liable to be declared wilful defaulters, it does inject a note of caution to the lenders that they should distinguish between promoters/ executive directors and nominee/ independent directors as well as follow the principles of natural justice in the process.

In conclusion, by further empowering the banks to take strong and proactive steps against recalcitrant borrowers and their promoters, a shot has been fired across the bows of corporate India. Whether this has a salutary effect on borrowers remains to be seen.

(The author is a partner with J. Sagar Associates. Views are personal)


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