Indian banks classified ₹28,784 crore of loans as wilful defaults in the April-December period of 2020, when the coronavirus pandemic swept across India, up from ₹23,783 crore a year ago.
A bank can label a borrower as a wilful defaulter if a loan is not repaid despite having the means to repay, and also when the loan is used for a purpose different from what it was taken for.
According to the latest data on suit-filed accounts from credit bureau TransUnion Cibil, the total outstanding wilful default as of 31 December now stands at ₹2.4 trillion. India’s largest lender, State Bank of India (SBI), accounts for ₹62,709 crore in this, adding ₹18,026 crore in the April-December 2020 period alone.
Lawyers and stressed asset experts said that even before the pandemic, several lenders used the wilful defaulter tag as a pressure tactic to force borrowers to pay up, and the practice grew in FY21 after the Insolvency and Bankruptcy Code (IBC) remained suspended.
A borrower labelled a wilful defaulter cannot access institutional finance to float new ventures for five years after his name is removed from the list of wilful defaulters.
“We have seen cases where our clients have been threatened with the wilful defaulter tag for simply missing repayments. Moreover, with the IBC being suspended, such instances rose last year," said an insolvency lawyer on condition of anonymity.
The suspension of the bankruptcy code was lifted on 31 March.
With nearly a quarter of all bank loans made to individuals and businesses in Maharashtra, the state also accounts for the largest share of wilful defaulters.
Maharashtra accounts for ₹86,163 crore in wilful defaults, followed by Delhi at ₹32,620 crore and West Bengal at ₹23,877 crore.
“Banks first try to restructure loans or use the IBC route and, suppose, none of this works, then they have no choice but to classify the borrower as a wilful defaulter," said Nirmal Gangwal, founder of debt restructuring advisory firm Brescon and Allied Partners Llp.
Gangwal added that many banks use wilful default as a recovery tactic.
“Some borrowers were alleged to have diverted funds when they used working capital loans from a bank to repay term loans of the same bank," said Gangwal.
The Insolvency and Bankruptcy Code is undoubtedly one of the most preferred channels used by lenders to resolve stressed corporate loans since decisions that are taken there have judicial backing.
Lenders worry about the three Cs—Central Bureau of Investigation (CBI), Comptroller and Auditor General of India (CAG), and Central Vigilance Commission (CVC)—and are not quite comfortable with bilateral resolution plans.
Aiming to curb wilful defaults, the Centre asked public sector banks in 2019 to check all non-performing loans above ₹50 crore for possible fraud.
The central bank has also reiterated that it is important to differentiate between inevitable defaults because of extraneous factor and those that are wilful. The Reserve Bank of India has mandated banks to submit a list of suit-filed accounts and non-suit filed accounts of wilful defaulters of ₹25 lakh and above on a monthly or more frequent basis to credit information firms.
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