Wilful defaulters: RBI tightens screws on corporate offenders

wilful defaulters
As RBI tightens norms to punish wilful defaulters, market regulator Sebi is shifting from a penalty-based system to an incentive-based one.

The Reserve Bank of India has revised its guidelines on wilful defaulters, directing lenders to identify such cases within six months of a loan becoming a non-performing asset. Under the new rules, banks must thoroughly examine all aspects of wilful default on accounts with outstanding dues of Rs 25 lakh or more. Moreover, non-banking finance companies and cooperative banks are now empowered to identify wilful defaults.

In a significant departure from the previous draft, the central bank stipulates that lenders should refrain from extending credit to wilful defaulters for new ventures or any entity associated with them for a period of five years after their removal from the wilful defaulter list. The revised guidelines also prohibit wilful defaulters from restructuring credit facilities.

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Notably, a few months ago, the RBI had allowed banks to enter into compromise settlements with borrowers classified as wilful defaulters or frauds, aiming to maximise recovery from distressed assets. A compromise settlement refers to a negotiated agreement between the borrower and the regulated entity to fully settle the claims in cash, which may involve a partial loss of the owed amount.

A wilful defaulter is an individual or guarantor who defaults on a loan despite having the means to repay it. Large defaulters are those with outstanding amounts of Rs 1 crore or more. One controversial aspect of the new norms was the provision allowing wilful defaulters or fraudulent companies to become eligible for new loans after 12 months of executing a compromise settlement.

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RBI tweaks mandate for wilful defaulters

The RBI faced opposition from two of India’s largest bank employee unions, which urged the central bank to withdraw this decision, fearing it would compromise the integrity of the banking system. Critics argued that lenient norms could incentivize more individuals and entities to become absconders and wilful defaulters. For instance, Gitanjali Gems, owned by fugitive businessman Mehul Choksi, remains the top wilful defaulter with an outstanding debt of Rs 7,848 crore as of March 31, 2022.

However, the RBI defended the revisions, stating they were made after a review and consideration of judgments/orders from the Supreme Court and high courts. The central bank has also called for feedback on the draft norms from regulated entities and stakeholders by October 31.

Meanwhile, the Securities and Exchange Board of India (SEBI) has relaxed borrowing norms for large corporations, shifting from a penalty-based system to an incentive-based one. This move, in response to representations from major corporates, is aimed at making it more affordable for them to raise funds from banks or financial institutions compared to debt securities.

SEBI’s decision comes at a time when there are indications of rising borrowing costs for Indian companies. High borrowing costs can lead to ongoing debt-service burdens, inefficiencies, and even economic downturns. A report by the IMF in May highlighted that countries like China, India, and Thailand had a significant share of corporate debt in firms with interest coverage ratios below one, indicating a susceptibility to default. Additionally, high corporate borrowing costs can dampen economic activity and increase the risk of corporate defaults and financial instability.

As part of the changes, SEBI has also raised the monetary thresholds for companies to qualify as large corporates. The requirement that compliance with the framework must be met over a contiguous block of three years remains in place. Corporates are no longer obligated to identify themselves as large companies, and the need for furnishing a statement regarding compliance with the framework has been eliminated.

In addition to these key changes for large corporates, various other amendments have been introduced in regulations related to the Investor Education and Protection Fund, listing regulations, REITs regulations, and InvIT regulations, streamlining the process for investors to claim unclaimed amounts held in the IEPF in a systematic manner.