Mumbai: Even after settling bank loans, a wilful defaulter will not be able to escape criminal proceedings as Indian banks have decided to introduce a clause in the so-called one-time settlement, or OTS, agreements they sign with borrowers that will clear the borrower of civil charges, but not criminal ones.
The decision was taken at a recent meeting of senior bankers with Central Bureau of Investigation, or CBI, director Ashwini Kumar and central vigilance commissioner Pratyush Sinha.
Wilful defaulters are those borrowers who have not repaid bank loans despite having the capacity to do so or have diverted bank funds. Those industrial units that fail to repay loans but dispose of assets that were pledged to get loans without knowledge of the lenders are also termed as wilful defaulters.
Tightening leash: CBI director Ashwini Kumar. The decision on a new clause in agreements was taken recently when senior bankers mer Kumar and Central Vigilance Commission chief Pratyush Sinha. Vipin Kumar / Hindustan Times
Banks enter into OTS with chronic defaulters to recover bad loans. In such settlements, they forgo interest and even part of the principal amount, depending on the loan profile.
The move follows feedback from the CBI about being rebuffed by courts for filing charge sheets against fraudulent borrowers when the banks involved had given them clean chits after entering into one-time settlements of the dues.
“We expect the bankers to come as witness when the case comes up for hearing in the court. CBI wants to retain the right to try the borrowers against whom banks have filed criminal complaints. Settlements should not absolve them of the charges,” said a CBI official on condition of anonymity.
The management committee of the Indian Banks Association, a national banker body, will finalize the modalities of the amendment to the one-time settlement agreements at its next meeting.
Under the law, banks are required to refer all loan defaults worth at least Rs1 crore to CBI. According to data on the Credit Information Bureau (India) Ltd’s website, commercial banks as of 30 September have filed suits against 1,557 accounts (classified as wilful defaulters) with loan defaults above Rs1 crore. The total value of the defaults is Rs12,560 crore.
In one of the earliest such instances, the Supreme Court in 1996 had dismissed a case moved by the CBI against Duncans Agro Industries Ltd as the banks had entered into settlements with the company.
Duncans Agro had been charged with cheating the lenders by falsely declaring tobacco stocks and stores available for hypothecation, while these were already hypothecated with other banks.
Hypothecation is a transaction where a person borrows money from a lender against a security of a movable asset. The security belongs to the borrower and remains in his possession during the repayment period. If the borrower fails to repay the loan, the financier can claim the hypothecated asset after obtaining court order.
The Supreme Court had held that “No prima facie case of cheating can be made out as grant of credit facility means that bank was prepared to give loans up to limit sanctioned.” It also said when the interest of the banks had been safeguarded in the civil suits instituted by the banks having ended in compromise, no useful purpose will be served in proceeding with further investigation.
Chairman and managing director of a Mumbai-based public sector bank said: “CBI is right in its demand as it gets into action only after the banks file a complaint with the investigating body. Banks should cooperate with the CBI when the case comes up for hearing.” The banker did not want to be identified.
Bankers expect that the decision to continue with the criminal proceedings even after the settlement will put the wilful defaulters on a high alert. The Reserve Bank of India (RBI) has progressively been tightening norms for bank financing of wilful defaulters.
In 2008, it barred banks and financial institutions from extending loans to promoters and entrepreneurs who have siphoned off funds or falsified accounts for five years to start new ventures.
The five-year ban kicks in from the date the promoter’s name is included in the list of wilful defaulters, put out by RBI.