May 16, 2024
📰 FEATURE STORY
Should the wilful defaulter tag be scrapped?
If you own a company or are a relatively wealthy person, you better pay back your dues. If not, the Reserve Bank of India (RBI) will deem you a wilful defaulter. An example is Vijay Mallya, the liquor baron who borrowed lots of money to kickstart Kingfisher Airlines. He’s now living a lavish lifestyle abroad despite not paying back the money he borrowed.
He’s the very definition of a “wilful defaulter”. The term’s literal meaning isn’t interpreted exactly this way. From time to time, the RBI has tried to streamline the definition and expand its scope. However, some have argued that this entire wilful defaulter mechanism and system should be scrapped. Is that a good idea?
Context
In 2017, India ranked 103 out of 189 countries in the World Banks’ Index on Ease of Resolving Insolvencies survey. It stated that it takes about 4 years to resolve insolvency issues in India, with a 26.4% recovery rate.
The government introduced the Insolvency and Bankruptcy Code (IBC) in 2016 to enable creditors to liquidate the funds from the defaulted entity in 270 days. In the 2017 Ease of Doing Business Index, India jumped to 77 from the previous year’s 100.
The banking sector’s stability and integrity are the RBI’s responsibility. One headache the central bank has faced is daunting statistics on India’s wilful defaulters. It suggests the country’s top 50 wilful defaulters owe over ₹92,000 crore to Indian banks. That has reflected poorly in some indices where India ranked low in dealing with non-performing loans.
The reason why wilful defaulters have garnered much attention in India is because of people like Vijay Mallya. He’s a high-profile person in a high-profile case. He was declared a wilful defaulter in 2015 by lenders. It took seven years for a group of banks led by the State Bank of India (SBI) to attach ₹19,111 crore worth of assets.
What can the RBI do? In its most recent wilful default guidelines from September, one of the tenets was expanding the definition. It includes borrowers who have siphoned off the money or failed to put forward equity despite agreeing to do so.
The curious thing is that the term wilful defaulter is quite unique to India. It doesn’t really appear elsewhere. Most countries have strict laws to ensure people and companies pay up. In Singapore, there are provisions to imprison defaulters for up to 7 years, a fine of $150,000, or in severe cases, both. The US has Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). In the UAE, authorities can seize the borrower’s assets, including properties and bank accounts.
Given how the Indian banking system and its laws have evolved over the past several decades, does the wilful defaulter system still make sense?
VIEW: It should be scrapped
The laws governing the system have certainly evolved over time to accommodate the changes in the banking sector and customers’ needs. Despite being in the digital age, the attitudes and rules of some bankers and regulators haven’t budged and changed. In 1999, the RBI asked banks to share details of wilful defaulters above ₹25 lakh to prevent them from getting fresh funding. In the times we’re in now, barring wilful defaulters from using banks was a rule put in place when technology wasn’t as pervasive.
Since there’s an insolvency law, there’s really no need for lenders to tag someone as a wilful defaulter. There’s also a risk for a bank if they decide to do so. In a recent ruling, the Bombay High Court said giving discretionary powers to commercial entities like banks without appropriate capacity and training by the rule of law is worrying.
The court saw this issue with some clarity. It proposed a better approach where a lender must follow natural justice and allow a borrower access to all investigative material before taking action. Also, a lender is a party to the credit contract. By extension, they’re not exactly an impartial arbiter in a wilful defaulter proceeding. What if the default is due to the lender not properly appraising the borrower’s creditworthiness?
COUNTERVIEW: It’s necessary
With its September wilful defaulter guidelines, the RBI has realised the problems of bad loans and non-performing assets as inherent and persistent. By enforcing stringent actions against wilful defaulters, the rules will discourage wrongful practices, promote responsible borrowing, and help reduce the burden on the banking system. For large defaulters, improved monitoring and reporting will help banks detect potential risks on time.
The problem of people not paying back their loans is only getting worse in India. As of March 2023, the number of wilful defaulters increased to over ₹3.5 lakh crore, involving over 16,800 accounts. SBI alone accounted for 1,921 accounts. An RBI circular from last June stated that wilful defaulters could be eligible for compromise settlements. This was after a Supreme Court order mandated lenders to give borrowers a chance to represent themselves before declaring their accounts fraudulent.
Some have even criticised the compromise settlements option. If some borrowers have wilfully lapsed on their financial obligations and engaged in fraudulent activities, they should be made to face the consequences. A stricter regime is necessary, according to some. That includes scrapping the possibility of defaulters being able to get fresh loans 12 months after the settlement. If the wilful defaulter tag should remain, then the individuals and companies should face the music.
Reference Links:
- Who is a wilful defaulter? An explainer as RBI expands the scope – Mint
- Wilful Default: A Local Solution For A Global Economic Menace – LiveLaw
- Have funds but not paying loan? Here’s what the Reserve Bank of India does with willful defaulters – Zee Business
- Do we still need the ‘wilful defaulter’ framework? – The Indian Express
- Scrap the ‘wilful defaulter’ tag: Indian banks’ transformation from cheque cashing to digital dash, but with a laggard – The Economic Times
- NPA and Wilful Defaulters: The Good, The Bad, and The Ugly Side – News18
- Wilful default cases on the rise: Banks filed suits against 36,150 NPA accounts to recover Rs 9.26 lakh cr in FY23 – Business Today
What is your opinion on this?
(Only subscribers can participate in polls)
a) The wilful defaulter tag should be scrapped.
b) The wilful defaulter tag shouldn’t be scrapped.
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