Banks reported as many as 16,044 borrowers with a cumulative debt of Rs 346,479 crore in the wilful default category — borrowers who refuse to repay loans despite having the capacity to make payments — as of December 2022. Some of these borrowers will be able to approach lenders for a compromise settlement following the Reserve Bank of India (RBI) decision to change the rules for eligibility that virtually reverses its earlier policy of keeping wilful defaulters out of its compromise settlement scheme.
The amount stuck in the wilful default category has jumped by 41 per cent, or over Rs one lakh crore in the last two years from Rs 245,767 crore in December 2020, according to data compiled by Transunion Cibil, a credit information company registered with the RBI. While most of the 16,000 plus wilful defaulters may not be eligible for the compromise settlement, some of them are likely to approach the lenders for the ‘settlement’.
Banks can undertake compromise settlements or technical write-offs in respect of accounts categorised as wilful defaulters or fraud without prejudice to the criminal proceeding underway against such debtors, the RBI said in a circular on June 8, 2023. Compromise settlement refers to a negotiated settlement where a borrower offers to pay and the bank agrees to accept in full and final settlement of its dues an amount less than the total amount due to them under the loan contract. This settlement invariably involves a certain sacrifice by way of write off and/or waiver of a portion of the lender’s dues on a one-time basis. Banks had approved several compromise settlements running into hundreds of crores with huge haircuts – or the reduction of outstanding payment or loans that will not be repaid by the borrowers – between 2000 and 2014, leading to huge losses for banks in the last two decades.
The central bank has also directed banks to fix a minimum cooling period of at least 12 months before making fresh exposures to borrowers who had undergone compromise settlements. This means a wilful defaulter or a company involved in fraud can get fresh loans after 12 months of executing compromise settlement.
As per the Reserve Bank of India’s (RBI) classification, a ‘wilful default’ would be deemed to have occurred if the borrower has defaulted in meeting their repayment obligations to the lender even when they have the capacity to honour the obligations. A wilful default happens when the borrower has not utilised the finance from the lender for the specific purpose for which finance was availed, and has diverted the funds for other purposes, or siphoned off funds, or disposed of or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank.
The central bank has virtually reversed its earlier policy of keeping wilful defaulters out of compromise settlement. On June 7, 2019, the RBI, in its ‘Prudential Framework for Resolution of Stressed Assets’, made clear that the borrowers who committed frauds/ malfeasance/ wilful default would remain ineligible for restructuring. Now this sudden change in the framework by the central bank to grant compromise settlements to wilful defaulters came as a shocker to the banking sector as it will not only lead to erosion of public trust in the banking sector but also undermines the confidence of depositors.
The RBI’s latest ‘Framework for compromise settlements and technical write-offs’ is considered as a “detrimental step that may compromise the integrity of the banking system and undermine the efforts to combat wilful defaulters effectively”. It not only rewards unscrupulous borrowers but also sends a distressing message to honest borrowers who strive to meet their financial obligations. “We firmly believe that allowing compromise settlement for accounts classified as fraud or wilful defaulters is an affront to the principles of justice and accountability,” said All India Bank Officers’ Confederation (AIBOC) and All India Bank Employees Association (AIBEA), representing 6 lakh bank employees.
There were 14,202 wilful default accounts involving Rs 285,474 crore as of December 2021 and 12,907 accounts for Rs 245,767 crore in December 2020, according to Transunion Cibil data.
State Bank of India (SBI) leads with 1,881 wilful default accounts for Rs 79,227 crore as of December 2022, followed by PNB at Rs 38,333 crore (2,143 accounts), Union Bank of India Rs 35,561 crore (1,747 accounts), IDBI Bank Rs 23,601 crore (335 accounts) and Bank of Baroda Rs 23,879 crore (2,203 accounts), according to data from Cibil website. Public sector banks account for 85 per cent of the wilful defaults at Rs 292,865 crore.
Among private banks, Axis Bank had 607 wilful default accounts for Rs 2,005.9 crore, ICICI Bank 59 accounts for Rs 2,136.5 crore and HDFC Bank 49 accounts for Rs 505.5 crore. Private banks (excluding IDBI Bank) reported 1.822 such accounts for Rs 30,809 crore as of December 2022.
Among financial institutions, HUDCO had 130 wilful default accounts for Rs 12,211 crore. LIC had 3 such accounts for Rs 2,800 crore and Exim Bank 15 accounts for Rs 3,651 crore as of December 2022.
“A wilful default means a promoter who had borrowed money has defaulted wilfully. When he had the capacity to pay, he did not pay, took out the money and siphoned off. Wilful defaulters are in all segments but only large cases are being reported. Mostly wilful default is examined in accounts above Rs 25 lakh and above,” said a senior banker.
Restructuring is often misused by banks and corporates for ‘evergreening’ problem accounts to keep the reported NPA levels low. Corporates were allowed to opt for the liberal restructuring route between 2000 and 2014 when a host of companies used fresh loans from banks to evergreen their loan books. However, with the enactment of the bankruptcy code, evergreening has declined but recovery has remained abysmally low.
Wilful default numbers are likely to remain elevated for next one year. After that the numbers will decline as the recovery process would have been completed and legacy NPAs would have been resolved. “Recognition of NPAs is already over but recovery actions are still happening. These are all part of the recovery actions. Once this is over then we should see it (wilful default number) ebbing away,” said another banker.
PSU banks accounted for 75.9% of aggregate gross NPAs compared to 61.9% of advances. Overall, the stress level of the banking sector has reduced as their outstanding SMAs (special mention accounts) and restructuring book have reduced significantly in Q3FY23, indicative of improving asset quality. This comes after covid pandemic and associated business disruptions have led to an increase in restructured standard assets over the past two years, according to Care Ratings.
Wilful default numbers are likely to remain elevated for next one year. After that the numbers will decline as the recovery process would have been completed and legacy NPAs would have been resolved. 
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