The growth and financial stability of a country depend on the financial soundness of its banking system. One of the parameters that are used to evaluate the banking sector’s financial health is the level of Non- Performing Assets (NPAs). Non- performing loans are those assets of the bank that have become non-functional as the respective borrowers and default their liabilities. Borrowed companies and individual that fail to pay up, do so due to hold back and simultaneously things going horribly wrong and beyond their control due to management incompetence, financial inadequacy, product failure, market competition, technological obsolesces, etc. However, there are some truant borrowers who, despite having the capability to repay the money, do not cough up the money, syphon off funds by disposing of assets without the knowledge of the bank. They are suspected to be doing it wilfully. They know for lenders, getting their money from them is often an extensive legal clash.
The Reserve Bank of India (RBI) may be going soft on banks in its asset quality review for the March quarter 2017, this has witnessed asset quality-related stress at banks residue very high. As an upshot of this, there is no respite from rapidly increasing bad loans for the lenders. Lenders after the lender, particularly public sector ones, have reported massive losses.
Hurtling Toward Failure
RBI has recently declared a dozen of suspected companies under insolvency category and 30-40 companies are in pipeline by the National Company Law Tribunal (NCLT) expected to declare soon. We can’t put out of your mind Vijay Mallya and Kingfisher Airlines (KFA) which have been much in the news over the suspected Rs 9,000 crore owed to lenders, whereas around Rs 1.14 lakh crore of bad loans had been written off by public sector banks involving numerous defaulters between 2013 to 2015, it’s an alarming situation for the Indian Banking Sector to have cleansing treatment of identifying these blackheads is not sufficient. Wilful Defaulters are the results of wilful blindness who have heavy debt-ridden and got the money from Public Sector Banks (PSBs) without any hitch and some of them have turned NPAs. There should be a forensic audit of all the NPAs as the Assets Quality Review (AQR) is aimed at one time cleansing the Balance Sheet. It will throw more KFAs from the cupboards of PSBs. Regulatory bodies need to fix accountability for those who had thrown public money without relevant questions being raised.
As an instance, Punjab National Bank’s (PNB) gross non-performing assets (NPAs) of Rs 34,338 crore have resulted from wilful defaults. As at the end December 2016, PNB had identified 904 companies as being wilful defaulters and filed cases against some of them. The number at the end of September 2015 was 764 companies and the value of unpaid loans then was Rs 9,204 crore.
On the contrary, if a layman thinks to raise credit his CIBIL score is checked. It is mandatory to maintain 750 scores as the creditworthiness of an individual for availing loans from banks and financial institutions. The question arises, is there any such provision of Reserve Bank of India (RBI) to identify the NPAs in corporate Such as Kingfishers which has made a historic attempt of willful defaulter and sack. It is well said, “Precautions are better than cure”. So what are the precautionary measures that RBI takes for identifying weak assets possibilities of flattering future NPAs.
The Bottom line
In India, Banks are reeling under a pile of bad loans, with strong back-end played by Reserve Bank of India (RBI) equipped with Insolvency and bankruptcy code (IBC) for accelerating the process to recognise and provision for weak assets (NPA) of Indian Bank. The attack on the non-performing assets (NPAs) began first in the year 2015 when the Reserve Bank of India (RBI) predetermined norms for early identification of weak assets in the banking sector. Later on, the RBI came with a March 2017 deadline for banks to cleanup their balance sheets by disclosing all the hidden NPAs. The whole exercise pressed banks to highlight accounts for a big chunk of impaired assets; the recovery of money still remained a major distress in the sector and the policy makers.
A major change has been observed in bank’s NPA battle due to access of the bankruptcy code injected. Under this, if the majority lenders concur, banks can take companies to NCLT with a request for time bound resolution plans. If the resolution process fails within a maximum of 270 days, then insolvency process is initiated against the concerned company. Further, with a mutual concern between banks and other stakeholders in the firm, they proceed in the liquidation process.
As per the RBI Guidelines, banks and institutions are required to submit the list of suit-filed accounts of wilful 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 the directors who were associated with the company at the time the account was classified as a defaulter. This helps to put other banks and institution, on guard against such individuals. This list can also include independent and nominee directors.
The most awful thing that can happen if companies get tagged as wilful defaulter, this choke off most of its credit channels and further, no added lending facility is available from any bank or institution. Also, shuts the door on any new ventures a wilful defaulter has not been permitted to float any new business for five years from the date of being declared a wilful defaulter. Lenders are also expected to initiate the 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 the wilfully defaulting company. Reserve Bank of India has framed rules defining willful default, a process to be followed by banks for declaring borrower as “willful defaulter”. Banks kick off action against such accounts under laws like Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act).
In order to check incidences of wilful default, RBI has tightened the norms and made it clear that the promoter of the defaulting company cannot escape from his responsibility even if he is not a whole-time director. As per earlier guidelines, a bank couldn’t label a non- whole-time director of a company as a wilful defaulter unless there was conclusive evidence that the individual was aware of the wilful default by the company and had not objected to it. A wilful default occurs when a borrower does not honor an obligation despite having the capacity to pay or siphons off funds by disposing of assets without the knowledge of the bank.
To Sum up:
In the near term, the economy will continue to recover from the temporary liquidity shock and transformation in the form demonetization, while adjusting to the new goods and services tax (GST), Insolvency and Bankruptcy Code (IBC), The Real Estate (Regulation and Development) Act (RERA) and Capital shortfall with banks due to willful defaulters. The Indian Banking System doesn’t need any more Vijay Mallya’s who pool public money and declare themselves as Wilful Defaulter.
Dr Sarika R. Lohana is Dr S Radhakrishnan Post-doctoral Fellow (UGC) in Humanity and Social Sciences, New Delhi. School of Commerce and Management, Swami Ramanad Teerth Marathwada University, Nanded (Maharashtra). She received her Masters of Commerce degree from SRTM University, Nanded; M.Phil. in Commerce from Alaggappa University, Karaikudi; Ph.D. from School of Commerce and Management University, Nanded and MBA in Finance from IGNOU New Delhi.
She has published papers in Indian Journal of Management Review; Global Journal of Multidisciplinary Studies and Asian Journal of Management Sciences. She is Joint-Secretary and Coordinator for Maharashtra of the FSLE-India, New Delhi. She is a Member of the Technical Committee on Social and Human Sciences, WASAT, (USA). She is author of book titled “Demonetisation, Digital India and Governance”.Her areas of research interest include Financial and Marketing Management, Entrepreneurship, Six Sigma, Corporate Finance, Neuro and Behavioural finance