RBI Tightens Screws On Defaulters – Livemint – 23-Dec-2014
December 27, 2014 - Uncategorized
The Reserve Bank of India (RBI) on Monday tightened the screws on bank customers who default on loans despite having the ability to repay their debts, creating a new category of borrowers classified as “non-cooperative” and asking banks to set aside higher provisions for incremental lending to such companies and their founders. Provisions for any new loans sanctioned to the new category of borrowers could rise from as low as 0.40% of the loan value currently to as high as 25%. Higher provisioning requirements will mean that borrowings costs will increase as soon as they are classified as non-cooperative, dissuading corporate customers from defaulting on loan repayments, analysts said. “A non-cooperative borrower is one who does not engage constructively with his lender by defaulting in timely repayment of dues while having ability to pay, thwarting lenders’ efforts for recovery of their dues by not providing necessary information sought, denying access to assets financed/collateral securities, obstructing sale of securities, etc. “In effect, a non-cooperative borrower is a defaulter who deliberately stonewalls legitimate efforts of the lenders to recover their dues,” RBI said in a notification. Non-cooperative borrowers are separate from those classified as wilful defaulters, a category first introduced under RBI guidelines in July 2012. A wilful defaulter is one who not only does not pay back bank loans, but also siphons off funds advanced by banks to put them to other uses. Borrowers who dispose of pledged property or moveable assets without the knowledge of creditors are also classified as wilful defaulters. The latest move is another step by the central bank to plug loopholes in bank lending processes and curb the rise in non-performing assets (NPAs) in India’s banking industry. Gross NPAs at 40 listed banks grew 17.49% to Rs.2.69 trillion in the quarter ended September from Rs.2.29 trillion a year ago. Banks have also restructured a cumulative Rs.3.67 trillion of loans until 30 September, data available on the corporate debt restructuring website show. A large part of the stressed assets stems from two years of sub-5% economic growth and stalled projects that crimped corporate cash flows and made it difficult for borrowers to repay debts. RBI governor Raghuram Rajan has argued that a part of the mountain of stressed assets is also a result of a weakening credit culture. “The sanctity of the debt contract has been continuously eroded in India in recent years, not by small borrower but by the large borrower,” Rajan said in a speech on 25 November, adding that wilful or non-cooperative defaulters should be seen as “freeloaders” and not lionized as captains of industry. “Promoters do not have a divine right to stay in charge regardless of how badly they mismanage an enterprise, nor do they have the right to use the banking system to recapitalize failed ventures,” Rajan said. The central bank’s intention behind tightening the norms is to ensure that the mistakes of the past are not repeated, said Vaibhav Agrawal, vice-president of research at Angel Broking Pvt. Ltd. “There were instances in the past when companies or promoters which had defaulted with one bank had no problem getting loans from other banks. Most mid to large Indian companies have five to ten bankers, so being classified as being non-co-operative will ensure that even if funds are available to these borrowers, it will be at a much higher rate,” he said. The central bank has set Rs.5 crore as the aggregate cut-off limit for classifying borrowers as non-cooperative and has widened the scope for such companies to include enterprises and people who run or manage these companies. “A non-cooperative borrower in case of a company will include, besides the company, its promoters and directors (excluding independent directors and directors nominated by the government and the lending institutions). In case of business enterprises (other than companies), non-cooperative borrowers would include persons who are in-charge and responsible for the management of the affairs of the business enterprise,” RBI said. Concerns over wilful defaults have risen following the case of Kingfisher Airlines Ltd. Banks are still struggling to recover the Rs.7,000 crore owed by the grounded airline. In September, Kolkata-based United Bank of India declared the airline’s promoter Vijay Mallya a wilful defaulter, only to be challenged in court. State Bank of India has also sent legal notices to Mallya, but is yet to declare him a wilful defaulter. “The idea of the RBI notification is to prevent banks from taking exposure to companies which may have already defaulted on existing loans. There have been instances when companies have defaulted on loans and gone to another bank with new securities for a fresh loan. This will stop that practice,” said R.K. Bansal, executive director at IDBI Bank Ltd. The category of non-cooperative borrowers could include borrowers who may not be in violation of a law but still pose a risk to the financial system due to their reluctance to cooperate with lenders. “This new definition will discourage borrowers from misusing the system. I think this will help in plugging some loopholes which exist,” said a analyst with a Japanese brokerage on condition of anonymity. The central bank has asked banks to put in place a clear mechanism for classifying a borrower as non-cooperative. Before being declared non-cooperative, a company will have to be screened by a committee headed by a bank executive director and two other officials of general manger or deputy general manager rank. “If the Committee concludes that the borrower is non-cooperative, it shall issue a show cause notice to the concerned borrower (and the promoter/whole-time directors in case of companies) and call for his submission and after considering his submission issue an order recording the borrower to be non-cooperative and the reasons for the same. An opportunity should be given to the borrower for a personal hearing if the committee feels such an opportunity is necessary,” RBI said. The order of this committee will be reviewed by another panel headed by the chairman or chief executive officer and managing director of the bank and also including two independent directors. If the second committee, too, classifies the borrower as non-cooperative, banks have to provide a higher amount of money for advancing new loans to the entity.