With the increased focus, over the past few weeks, on the huge pile of bad loans — The Indian Express published a multi-part investigation last month on the Rs 1.14 lakh crore of debts written off by 29 state-owned banks between 2013 and 2015 — Indian banks have declared a few promoters including Vijay Mallya, director of Kingfisher Airlines who is now believed to be in the UK, a “wilful defaulter”.
But as lenders and investigative agencies mount pressure to recover the Rs 7,000 crore lent to Kingfisher Airlines, Mallya has claimed that he and his companies are being labeled wilful defaulters only on “technical grounds”.
So, what constitutes a wilful default?
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According to a Reserve Bank of India circular of July 1, 2014, and a subsequent amendment of January 7, 2015, a default — not meeting loan repayment obligations — is wilful when it fulfils one of the following four conditions:
* A borrower (or an entity) does not pay up even when it has the capacity to pay,
* a borrower has not used the loan for the purpose borrowed and diverted the money elsewhere,
* a borrower has siphoned off the funds and the money is not available with it in the form of other assets, and,
* a borrower sells assets given as security against the loan without informing lenders.
And who can be termed a wilful defaulter?
Wilful defaulters can be individuals, juristic persons (groups of individuals, such as corporations, which are treated by law as though they are persons) and all forms of business enterprises. In case of business enterprises (other than companies), banks and financial institutions can report the names of those persons who are in charge, and are responsible for the management of the affairs of the business enterprise.
How do banks identify a wilful defaulter?
According to bankers, an internal committee, typically headed by an executive director and consisting of two senior bank officials, scrutinises cases of deemed wilful defaults based on reports by the credit monitoring or recovery departments. This panel also looks into the efforts made by the bank to recover the dues, the repayment capacity of the borrower, and end use of the funds before identifying an individual as a wilful defaulter. Of late, banks have started conducting forensic audits on deemed defaulters through a third party before referring it to this committee.
Once a borrower is identified as a wilful defaulter, a showcause notice is issued, and the borrower is generally given 15 days to reply. The internal committee order and the submission made by the borrower is reviewed by a so-called review committee, usually headed by the chairman and managing director, or by another executive director. If the review committee confirms the findings, the bank declares a borrower a wilful defaulter.
Why have Mallya, Kingfisher and United Breweries (Holdings) been named wilful defaulters?
State Bank of India has alleged that funds were diverted several times from Kingfisher Airlines to various UB Group companies and other firms. It said as much in an August 2014 notice sent to Mallya, Kingfisher, United Breweries, and its directors, and filed in the Bombay High Court. The notice also alleged that United Breweries (Holdings), the parent company, had been “deliberately avoiding payment to lenders”.
The SBI notice was based on the findings of a forensic audit of Kingfisher Airlines. However, Mallya has claimed that all inquiries have failed to find any evidence of misappropriation of funds by him and Kingfisher Airlines. He and United Breweries have challenged the SBI order, and the case is now pending in the Bombay High Court. Apart from SBI, United Bank of India and Punjab National Bank have declared Kingfisher and Mallya wilful defaulters.
Who are India’s other prominent wilful defaulters? How much do wilful defaulters owe Indian banks?
Mallya’s Kingfisher is among the top five wilful defaulters in the country, the others being Winsome Diamonds and Jewellery, Zoom Developers, Suryavinayak Industries and Deccan Chronicle Holdings.
Wilful defaulters owe state-owned banks at least Rs 64,335 crore, according to a February 2016 report of the Standing Committee on Finance. That is about 21 per cent of the total non-performing assets or bad loans of Rs 3.06 lakh crore. At the end of September 2015, State Bank of India had the most wilful defaulters — 1,160 — who owed it Rs 11,700 crore. Punjab National Bank had 904 wilful defaulters, who owed it Rs 10,869 crore at the end of December 2015.