Industry
Wilful default: RBI to tweak rules to give lenders flexibility in handling cases
Summary
The Reserve Bank of India (RBI) is considering making in-person hearings with borrowers mandatory for lenders dealing with potential wilful defaulters, in an effort to increase chances of recovery at an early stage.
New Delhi: Lenders may get more flexibility in dealing with potential wilful defaulters as the central bank may make in-person hearings with borrowers mandatory at the time of identifying a loan account as stressed, two persons aware of the development said. Earlier, in-person hearings were optional, and were conducted at the last stage just before classifying a borrower as wilful defaulter.
The Reserve Bank of India (RBI) is considering the change on the suggestions of banks, which believe that chances of making recoveries are higher if a dialogue is started at an early stage, the people cited above said on the condition of anonymity. The wilful defaulter tag shuts out borrowers from the formal banking sector.
Finance ministry officials who met some of India’s top bankers recently also favour such flexibility, rather than sending all such accounts into a protracted legal process, the people cited above said. The changes may figure in RBI’s final guidelines on Wilful Defaulters Framework for Compromise Settlement and Technical Write-offs expected in January.
In September, the central bank had issued a draft paper on wilful default, proposing to refine the identification process and complete the entire process within six months after an account is classified as a non-performing asset (NPA). As per existing guidelines, banks can tag an account as NPA if the default continues for 90 days.
According to the persons cited above, while flexibility is expected in dealing with stressed accounts, the apex bank may stick to the current six-month period for declaration of wilful defaulters from the time an account gets classified as NPA. The central bank wants firm and quick action on such accounts, and does not favour the idea given by banks to extend this period to one year, the people said.
Queries sent to spokespersons of RBI and the finance ministry remained unanswered.
A Supreme Court order in March regarding RBI’s 2016 circular on wilful defaults had said that borrowers should get ample opportunity to make a representation before banks tag them wilful defaulters, and the action should not be unilateral. Following this, RBI issued draft guidelines for defaults over ₹25 lakh, mandating completion of the process in six months; earlier, there was no time limit. These draft guidelines are now being finalized after considering views of all stakeholders.
Banks may be allowed to seek representation from borrowers if they fear the account is heading for wilful default. Later, a bank panel will identify wilful default, which will be vetted by a review committee before final classification.
“Such an option would allow banks to identify the problem areas before an account gets the tag of wilful default. Giving option to borrowers for in-person representation after (wilful default) identification and review committee’s rulings prevents action that can be taken to resolve the default early, than take it closer to being tagged as wilful defaulter," the head of a public sector bank said, asking not to be named.
An official from one of the Big Four auditors said the changes, if brought in by RBI, will help reduce cases of wilful default and improve chances of recovery.
Banks wrote off loans (on account of frauds and corporate loans) totalling ₹209,144 crore in FY23, according to prvisional data from RBI, against ₹174,966 crore in FY22. The bulk of loan write-offs was done by public sector banks.
The new rules will strengthen credit discipline by providing a guided step path for identifying and classifying wilful defaulters, said Utsav Johri, partner, JSA Advocates & Solicitors.“The draft directions also clearly provide that the name of any wilful defaulter will be removed from the list of wilful defaulters after implementation of the resolution plan under IBC or the Prudential Framework for Resolution of Stressed Assets which will result in a change in the management and control of the entity/ business enterprise. This will provide much needed clarity to the stakeholders in the resolution process," he added.
