In this article, aspirants can get a brief overview of Willful Defaulting and the concept of Willful Defaulters.
Willful Defaulting
Credit information Bureau (India) Ltd (CIBIL) the agency which collate data on credit has came up with a renewed list of willful defaulters which shows that till 2015 December 6819 willful defaulters owed banks Rs.74,699 Crore rupees. Recently willful defaulting has been taken centre stage in news media and financial circles. Most notable case among them was when SBI led consortium of banks alleged kingfisher owner Vijaya Mallya of willfully defaulting Rs. 9000 Crores.
Vijaya Mallya and SBI chief Arundhati Bhattacharya
Total amounts on suits filed against accounts of Rs. 1 Cr and above of defaulting (both willfully and otherwise) as on Sept 2015 was at a shocking Rs. 1.3 lakh Crores and of these public sector banks took the biggest hit of around 90,000 crores.
What is willful defaulting?
RBI defines willful defaulting as deliberate non-payment of dues by the borrower despite of adequate cash flow and good net worth. This can also arise when asset bought by the lenders has been sold off without the knowledge of the banker or the loaned amount is siphoned for purposes other than that for which it was availed.
Socio-political questions that arise
A highly intense debate was triggered immediate afterwards. The way in which some defaulting companies went unscathed raised serious questions. This is in stark contrast to situations where banks choose to go hard against defaulting farmers to recover the bad loans. Recent times have witnessed a jump in farm suicides most of which could have been avoided with better financial reach, credit access and milder recovery measures if not complete loan waiving.
Courtesy: times of india
By current estimates less than 10% of the defaulters account for more than 50% of the defaulted amount. The fact that public sector banks who also have social and policy roles to carry out account for 60% of that amount also exposes the extent to which it can affect the ordinary lender. Civil society is mulling over why such high amount of money is lent and lost on such small number of individuals.
Where does the fault line lie?
The major factors which has led to this situation of high defaulting has led to correspondingly high Non-Performing Assets undermining the banking sector from within . Structural weaknesses include,
- bad banking practices
- discretionary powers with banking officials
- lobbying from influential industrial houses which generates extra pressure from political quarters on banks.
- Cut throat completion between banks leading to issuance of unsecured loans is also a concern.
All the above reasons lead to banks ending up lending out huge sums without due diligence and sufficient collaterals.
Is every instance defaulting also a case of financial misappropriation?
Investigative agencies have found lot of financial irregularities among the defaulting companies over the course of time. One of them being diversion of loaned amount for other purposes by using fake invoices from other companies mostly owned by the promoter of the defaulter company.
But there can be cases when its not resulted from misappropriation but from mismanagement or a faulty blue print for running the company.
Companies often claim non-payment to be the result of non-payment from the side of customers. The topper in the CIBILS’ published list of defaulters came up with a similar claim that customers based in Middle East didn’t pay their dues of the order of 2000 crores.
Experts also points out the failure of IPO plans and write offs in overseas partnerships as a significant reason for defaulting in some cases.
We should understand these are avoidable by having a stringent framework regulating the financial sector.
What a bank can do if someone willfully defaults.
RBI recently came up with a circular giving the steps to be taken against a willful defaulter. But before applying those certain things have to be ensured.
- bank have the responsibility to furnish sufficient evidence before announcing someone as a defaulter
- reasonable time should be allotted to the company to make representations against the decision.
Major directives as per the circular are,
- Disable the willful defaulter from availing any more credit from the banking system.
- Criminal proceedings to be initiated against the defaulter.
- Banks to be given the right to change the management of the defaulting company.
Other major move on the anvil is consolidation of public section banks which is being actively pursued by the current central government. Although this move is not directly targeted towards reducing NPAs or clamping down on willful defaulters it will have a correctional effect on these issues. This is due to the fact that consolidation of banks will give the ability to these banks to agree on a common recovery program to recover such bad loans. Consolidation is also expected to contribute towards cost rationalization and attaining geographical synergies.
Is financial ethics a problem area here?
Post 2008 financial ethics has become a paradigm in analyzing market situations. Greed is being attributed frequently when financial irregularities happen rampantly. But the question remains as to whether the best way to solve it is to preach a market place based on moral principles or to establish a firm framework which can fill up the loopholes that enable such irregularities to happen.
Collapse of Lehman brothers and crisis which followed in 2008 triggered the debate of ethics in financial system.
Another issue is the problem of equating moral behavior with legal behavior. There can be situations where deeds which are not illegal can still be immoral. In these cases upholding the spirit of the law rather than the law itself is of great importance.
Conclusion.
India is in the cusp of a major economic revival and for this the robustness of financial sector is key. Any steps towards thwarting problems like willful defaulting will go a long way in achieving that. This is obvious if we compare the amount willfully defaulted with the amount that is needed for bank capitalization for meeting BASEL III norms. RBI giving guidelines for dealing with this is a welcome step. Proper implementation is required at this point. Needless to say strong political will is essential for that. Also a breakthrough was achieved this week when Mr.Vijaya Mallya offered 4000 crores to the banks towards the settlement of the case giving the indication of a healthy legal conclusion to the current fiasco. But these will prove to be inadequate if elaborate banking reforms are not carried out in the coming years.
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