The Reserve Bank of India (RBI) has issued norms for identification of what it calls “non-cooperative borrowers” in addition to those classified as “wilful defaulters”. The new category includes anybody “who deliberately stonewalls legitimate efforts of the lenders to recover their dues”. Such borrowers do not provide necessary information sought by lenders, deny access to assets finances or obstruct sale of collateral securities. In effect, what the RBI is doing is tightening the screws on defaulting borrowers by making it difficult for them to access funds in future — and also for banks to lend to these companies or individuals by virtue of having to set aside more capital against any fresh exposures. Besides, banks will have to report information of any non-cooperative borrowers to a centralised repository, which means that the latter cannot take money from another lender after defaulting on an existing loan.
The RBI’s latest tightening of regulations is part of its ongoing effort to push banks — especially in the public sector — to go after large promoters who have managed to retain control even after running down their companies. Ideally, this initiative should have come from the banks themselves. The huge pile of bad loans — according to RBI Governor Raghuram Rajan, banks have made write-offs of a staggering Rs 1,61,018 crore, amounting to 1.27 per cent of India’s GDP, in the last five years — is largely a product of imprudent lending. The RBI had, even in the past, mandated a sharing of information relating to borrowers to prevent them from playing one bank against another. But in the years of high growth, banks, mainly state-owned, engaged in competitive lending that has now come to haunt them.
As Rajan put it in a recent address, while globally, a large borrower who defaults is contrite and desperate to regain the trust of lenders, in India, the same person would insist on a divine right to stay in control. This can change only by forcing non-cooperative borrowers and wilful defaulters out of the formal financial system. The RBI should work with Sebi to ensure that defaulting firms and their promoters are also denied access to fund-raising from the capital markets. Further, there is need for the government to empower the boards of state-owned banks, while simultaneously fixing accountability for their actions.