WILFUL DEFAULTERS
1. Context
The Reserve Bank of India (RBI) proposed that lenders should classify a borrower as a “wilful defaulter” within six months of their account being declared a non-performing asset (NPA)
2. Wilful defaulter
- "Wilful defaulters" is a term used in the context of banking and finance to refer to individuals, companies, or entities that deliberately and intentionally default on their loan repayments or fail to meet their financial obligations to a lending institution, such as a bank or a financial institution. In other words, wilful defaulters are borrowers who have the ability to repay their loans but choose not to do so
- The RBI identifies wilful defaulters as those who have the ability to pay a bank’s dues but do not or divert bank funds. While large defaulter means a defaulter with an outstanding amount of Rs 1 crore and above, and whose account has been classified as doubtful or loss, a wilful defaulter means a borrower or a guarantor who has committed wilful default and the outstanding amount is Rs 25 lakh and above.
- The lender shall examine the ‘wilful default’ aspect in all accounts with outstanding amount of Rs 25 lakh and above or as may be notified by the RBI from time to time, and complete the process of classification/ declaring the borrower as a wilful defaulter within six (6) months of the account being classified as NPA
- It said the evidence of wilful default needs to be examined by an Identification Committee, to be set up by lenders
- In case of publishing photographs of wilful defaulters, lenders will have to formulate a non-discriminatory board-approved policy that clearly sets out the criteria based on which the photographs of persons classified and declared as wilful defaulters will be published
- The RBI also proposed that no additional credit facility be granted by any lender to a wilful defaulter or any entity with which a wilful defaulter is associated
3. Non-Performing Assets (NPAs)
Non-Performing Assets (NPAs), also known as Non-Performing Loans (NPLs) or bad loans, are financial assets held by banks and other financial institutions that have stopped generating income for the lender because the borrower has defaulted on their loan payments. In other words, NPAs are loans or advances that have not been serviced by the borrower according to the agreed-upon repayment schedule. NPAs are a common concern in the banking and financial industry, as they can have significant implications for financial institutions and the overall economy. Here are some key points about NPAs:
Classification Criteria: The classification of an asset as an NPA typically depends on the number of days a borrower has failed to make scheduled payments. The exact criteria for NPA classification may vary from one country's banking regulations to another. In many cases, NPAs are classified into three categories:
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- Substandard Assets: Assets where the borrower has delayed payments for a certain period (e.g., 90 days) or is unlikely to make full payments.
- Doubtful Assets: Assets where the likelihood of full repayment is even less certain than substandard assets. These assets are often subject to significant uncertainty.
- Loss Assets: Assets that are considered uncollectible, and full loss provisioning is required.
4.What are the impacts of High level of non-performing assets (NPAs) on India’s Economy?
A high level of Non-Performing Assets (NPAs) in India's banking sector can have several significant impacts on the country's economy. NPAs, also known as bad loans, are loans that borrowers have defaulted on or failed to repay, and addressing this issue is crucial for maintaining the stability and growth of the Indian economy.
High levels of non-performing assets (NPAs) can have a number of negative impacts on India's economy, including:
- Reduced profitability of banks: NPAs reduce the profitability of banks by reducing their income and increasing their expenses. This can lead to lower dividends for shareholders and less capital available for lending.
- Reduced availability of credit: When banks have high levels of NPAs, they are less likely to lend money to businesses and individuals. This can lead to a decrease in investment and consumption, which can slow down economic growth.
- Increased risk of financial instability: High levels of NPAs can increase the risk of financial instability in the economy. This is because if a large number of borrowers default on their loans, it can lead to bank failures.
- Increased cost of borrowing: When banks have high levels of NPAs, they may charge higher interest rates on loans to compensate for the increased risk. This can make it more expensive for businesses and individuals to borrow money, which can further dampen economic growth
5.Way forward
Non-Performing Assets are a critical concern for the banking and financial sector, as they impact profitability, liquidity, and the overall health of the financial system. Managing and reducing NPAs is a priority for financial institutions and regulators to maintain financial stability and support economic growth
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For Prelims: Non-Performing Assets (NPAs), Wilful defaulters
For Mains:1.Discuss the concept of Non-Performing Assets (NPAs) in the banking sector. What are the main factors contributing to the rise in NPAs in India, and what measures have been taken by the government and regulators to address this issue?
2.Examine the role of asset quality reviews (AQRs) in the identification and management of NPAs in Indian banks. What lessons can be drawn from international practices in dealing with NPAs?
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Previous Year Questions
1.Consider the following statements: (UPSC ESE 2018 Paper 1)
Non-performing assets (NPAs) decline in value when
1. Demand revives in the economy.
2. Capacity utilization increases.
3. Capacity utilization, though substantive, is yet sub-optimal.
4. Capacity utilization decreases consequently upon merger of unit.
Which of the above statement are correct?
A. 1, 3, 4
B. 1, 2 and 4
C. 1, 2 and 3
D. 1, 2, 3, 4
Answer (C)
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Source: indianexpress
