BackMore curbs in offing for wilful defaulters
The finance ministry is in talks with the RBI to ensure defaulting firms are not able to open accounts in banks that are not part of the lending consortium
Premium
New Delhi: The finance ministry is in talks with the Reserve Bank of India (RBI) to ensure defaulting companies are not able to open accounts in banks that are not part of the lending consortium to divert their cash flows.
Kingfisher Airlines Ltd is one of the many firms that had opened current accounts with a private bank and maintained a healthy balance despite defaulting in loans.
Kingfisher Airlines’ promoter Vijay Mallya and three directors—A.K. Ganguly, Subhash Gupte and Ravi Nedungadi—were declared wilful defaulters by United Bank of India on Monday, after a prolonged battle that saw the two parties battling it out in the Calcutta High Court and the airline approaching the Supreme Court on Friday.
There have been other instances where companies that have not been able to service debt have funds in an account with some private bank, a finance ministry official said. He declined to name the other companies.
“We can only direct state-run banks that they should not open bank accounts of such companies," he said, requesting anonymity. “But the problem is with private banks. We have taken up the issue with the central bank as it is the banking regulator and can lay down rules for all banks, irrespective of their ownership."
Kingfisher owes ₹ 6,521 crore to the lender consortium and an additional ₹ 403 crore to United Bank of India. But it had a current account with a private sector bank with a cash balance of ₹ 7.5 crore, finance ministry data show.
The steps initiated by the ministry are part of the government’s efforts to bring to task wilful defaulters, especially such companies that are sick but are run by affluent promoters.
“The practice of having surplus money somewhere and diverting these funds to another account is covered under the wilful defaulter description," said Ananda Bhoumik, senior director at India Ratings. “It is critical to strengthen the collateral recovery mechanism. The changes being planned in the Sarfaesi Act and the debt recovery Act will help banks in the recovery process."
As part of its efforts to help banks with recovery, the finance ministry is considering bringing amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (Sarfaesi) and the debt recovery Act (Recovery of Debts due to Banks and Financial Institutions Act, 1993) in the winter session of Parliament.
Gross bad loans of 40 publicly traded banks rose to ₹ 2.42 trillion on 31 March, up from ₹ 1.8 trillion a year ago.
The Sarfaesi Act empowers banks to recover bad debt without the intervention of the courts, which include changing the management of such companies. Although the government had asked banks to change the managements of companies in case they are found to be wilful defaulters, banks are unable to do so because of a clause in the Sarfaesi Act that requires them to reinstate the old management once the recovery process is completed.
Similarly, the debt recovery law formulated to help banks recover dues from defaulters by setting up of debt recovery tribunals for disposal of loan-related disputes has not been very effective because of long delays and pending cases.
“The amendment to the Sarfaesi Act will help banks to hand over a sick company to a new management who can infuse fresh funds into the company. The amendment to the debt recovery Act will help in reducing the number of adjournments to case in front of a tribunal," said the ministry official cited earlier.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
