Wilful defaults rise to Rs 3.53 lakh crore, to spike further | Business News

Banks have filed suits against 36,150 NPA accounts to recover Rs 926,492 crore as of March 2023. Many of these legacy accounts are likely to be added to the wilful default category when the RBI issues the final guidelines.

Interestingly, NPAs — loan accounts in which principal or interest is overdue for more than 90 days — which declined to a 10-year low of 3.9 per cent in March 2023, is expected to fall further to 3.6 per cent by March 2024, the RBI’s latest Financial Stability Report said.

As per the RBI classification, a ‘wilful default’ would be deemed to have occurred if the borrower has defaulted in meeting their repayment obligations to the lender even when they have the capacity to honour the obligations.

On September 21, the RBI proposed that lenders should complete the process of classification of a borrower as ‘wilful defaulter’ within six months of the account being declared as non-performing asset (NPA). The revision of norms comes after a review of the instructions and consideration of various judgments and orders from the Supreme Court and High Courts, as well as representations and suggestions received from banks and other stakeholders, the central bank said. It said the evidence of wilful default needs to be examined by an Identification Committee, to be set up by lenders.

However, wilful defaulters will be eligible for compromise settlements as per a June 8, 2023 circular of the RBI. As much as 77 per cent of the total wilful defaults are accounted by nationalised banks and SBI.

A wilful default happens when the borrower has not utilised the finance from the lender for the specific purpose for which finance was availed, and has diverted the funds for other purposes, or siphoned off funds, or disposed of or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank.

On June 8, 2023, the RBI said in a circular that banks can undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors. Compromise settlement refers to a negotiated settlement where a borrower offers to pay and the bank agrees to accept in full and final settlement of its dues an amount less than the total amount due to them under the loan contract.

This settlement invariably involves a certain sacrifice by way of write off and/or waiver of a portion of the lender’s dues on a one-time basis. Banks had approved several compromise settlements running into hundreds of crores with huge haircuts – or the reduction of outstanding payment or loans that will not be repaid by the borrowers – between 2000 and 2014, leading to huge losses for banks in the last two decades.

The central bank also directed banks to fix a minimum cooling period of at least 12 months before making fresh exposures to borrowers who had undergone compromise settlements. This means a wilful defaulter or a company involved in fraud can get fresh loans after 12 months of executing compromise settlement.

The central bank has virtually reversed its earlier policy of keeping wilful defaulters out of compromise settlement. On June 7, 2019, the RBI, in its ‘Prudential Framework for Resolution of Stressed Assets’, made clear that the borrowers who committed frauds/ malfeasance/ wilful default would remain ineligible for restructuring. Now this change in the framework by the central bank to grant compromise settlements to wilful defaulters came as a shocker to the banking sector as it will not only lead to erosion of public trust in the banking sector but also undermines the confidence of depositors.