The Wilful Defaulter Syndrome in Banks

Introduction:

Wilful default means when there is deliberate on-payment of the loan dues despite having adequate cash flow and sound net worth. Reserve bank of India (RBI) defines wilful default if any of the following events occurs[1]:

(a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honor the said obligations.

(b) The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

(c) The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

(d) The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed of or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.

There have been many incidents of linkage between corruption and the banking sector. Owing to this, the Central Vigilance Commission (CVC), issued guidelines to improve vigilance administration in banks in 1998[2]. India is one of the few economies that has issued the guidelines warning the banks on the possibilities of corruption in bank lending.

CVC issued the guidelines to RBI to report wilful default cases of ₹2.5 million. Owing to this, RBI advised the banks to report the wilful defaulters of loan amount above ₹ 2.5 million along with the names of the promoter directors.

Mechanism to Identify Wilful Defaulters

1. The evidence of wilful defaulter is examined by a Committee headed by an Executive Director or equivalent and it consists of two other senior officers of the rank of GM/DGM.
2. If the committee is of the view that there is an event of wilful default, then it shall issue a show-cause notice to the concerned borrower and the promoter/whole-time director and call for their submissions.
3. After considering their submission, the committee issue an order recording the fact of wilful default and the reasons for the same.
4. If the Committee feels that an opportunity is necessary, then the opportunity is given to the borrower and the promoter/whole-time director for a personal hearing.
5. The order of the Committee is reviewed by another Committee headed by the Chairman/Chairman & Managing Director & Chief Executive Officer / CEOs and consisting, in addition, to two independent directors / non-executive directors of the bank and the Order shall become final only after it is confirmed by the said Review Committee. [3]

Criminal Action against Wilful Defaulters

1. Companies Act, 2013– Section 447 and 448 deal with wilful defaulters. Section 447 talks about someone being found guilty of fraud, shall be punishable with imprisonment of six months which can extend up to ten years, or with a fine of amount three times more than the involved in the fraud or with both.[4] Section 448 gives out punishment for false statements[5].
2. Indian Penal Code, 1860– A wilful defaulter can be prosecuted under Section 403 and Section 415 of IPC. Section 403 deals with the dishonest misappropriation of property which states that a person who has been held liable for this offense and shall be punished with imprisonment for a term which may extend to two years or with fine or with both.[6] Further, Section 415 states the offense of cheating[7].
3. Passport Act, 1967 – Section 10 of the Act needs to be amended to provide for wilful defaulters of loans above a specified limit of debt that may be treated as a financial and economic risk in the public interest. Section 10 mainly deals with the impounding of passports[8].
4. SARFAESI Act, 2002– Under the SARFAESI Act, 2002, if the borrower does not provide asset details, and for the lender getting the possession of the mortgaged property in 30 days, then there can be imprisonment of three months.
5. Under the Securities and Exchange Board of India, wilful defaulters are disallowed from boards and they are restricted from raising capital and be allowed in capital market activities.

In the case of State Bank of India vs. M/s. Jah Developers Pvt. Ltd. and Ors[9], a pertinent question arose that whether a person is declared to be a wilful defaulter under the Circulars of RBI, whether such person is entitled to be represented by a lawyer of its choice before such declaration is made. The Supreme Court considers the question as to whether a lawyer is allowed to represent the borrower before the First Committee and/or Review Committee under the revised circular of RBI dated 01.07.2015.

The Apex out held that in-house committee are neither tribunal nor are vested with any judicial powers. Court held that once the First in-house Committee declares a borrower a wilful defaulter, it shall serve a copy of the order to the borrower. Then the borrower is given the opportunity to make his representation within 15 days before the Review Committee, after that the Committee passes the order with evidence relied on the facts.

The Court is of the view that the events of wilful default consist of the borrower’s version of facts. Hence, a lawyer is not necessarily required at such hearings as no complicated questions of law are to be presented before the in-house Committees[10].

Conclusion

Banks must take stringent steps to restrain the wilful default in banks. Banks can keep track of business activities after it sanctions the loan in order to identify the probable defaulter. This will ensure that banks can take corrective actions in a timely manner. There should be a thorough assessment of the borrower’s assets other than those pledged as collateral. It will ensure banks to recover their loans in case of wilful default. There should be quick disposal of cases of wilful default. CVC, RBI, SEBI have all come together to address the issue of bad loans and defaults.   Stringent actions should be taken on wilful default. 

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References:

[1] Master Circular on Wilful Defaulters, RBI/2014-15/73, https://www.rbi.org.in/CommonPerson/english/Scripts/Notification.aspx?Id=1458

[2] Central Vigilance Commission, No.8(1)(h)/98(2), 27^th November, 1998, https://cvc.gov.in/sites/default/files/ins2.pdf

[3] Mechanism of Identification of Wilful Defaulters, Master Circular on Wilful Defaulters, RBI/2014-15/73, https://www.rbi.org.in/CommonPerson/english/Scripts/Notification.aspx?Id=1458

[4] Section 447, Companies Act, 2013.

[5] Section 448, Companies Act, 2013.

[6] Section 403, Indian Penal Code, 1860.

[7] Section 415, Indian Penal Code, 1860

[8] Section 10, Passports Act, 1967.

[9] State Bank of India v. Jah Developers Pvt. Ltd, AIR 2019 SC 2854

[10] Devesh Juvekar and Dikshat Mehra, Master Circular on Wilful Defaulters and the consequences of being declared a Wilful Defaulter: Overview, Bar and Bench,  June 7, 2019, https://www.barandbench.com/columns/overview-master-circular-on-wilful-defaulters