WILLFUL DEFAULTERS
1. Context
The Reserve Bank of India (RBI), in a controversial move, has allowed wilful defaulters and loan accounts involved in frauds to go in for a compromise settlement with banks to settle their dues. A section of bankers says the RBI decision may be detrimental to the banking system and depositors as the wrongful actions of such defaulters and fraudsters are being condoned, placing the burden of their misdeeds on the shoulders of ordinary citizens, especially depositors.
2. What is a Compromise Settlement?
- A 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 relative loan contract.
- This settlement invariably involves a certain sacrifice by way of write-off and/or waiver of a portion of its dues on a one-time basis.
- In the last two decades, banks have approved several compromise settlements, running into hundreds of crores with huge haircuts – or the reduction of outstanding payments or loans that will not be repaid by the borrowers – leading to huge losses for banks.
3. RBI Analysis
- In the last two decades, banks have approved several compromise settlements, running into hundreds of crores with huge haircuts – or the reduction of outstanding payments or loans that will not be repaid by the borrowers – leading to huge losses for banks.
- 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 a compromise settlement.
4. Detrimental Nature of RBI's Compromise Settlement Framework
- Detrimental Step: The RBI's 'Framework for compromise settlements and technical write-offs' is viewed as detrimental. It raises concerns about compromising the integrity of the banking system and undermining efforts against wilful defaulters.
- Rewards Unscrupulous Borrowers: The framework is criticized for rewarding unscrupulous borrowers who have engaged in fraudulent activities. This undermines the message to honest borrowers who diligently fulfill their financial obligations.
- Opposition from Bank Unions: The All India Bank Officers' Confederation (AIBOC) and All India Bank Employees Association (AIBEA) representing 6 lakh bank employees oppose compromise settlements for fraud or wilful defaulters. They argue that such settlements go against the principles of justice and accountability.
- Impact on Financial Stability: Wilful defaults have a significant impact on the financial stability of banks and the overall economy. Allowing compromise settlements condones wrongful actions and places the burden of misdeeds on ordinary citizens and hardworking bank employees, according to bank unions.
5. Reversal of Policy on Wilful Defaulters in Compromise Settlements
- Policy Reversal: The central bank has reversed its previous policy of excluding wilful defaulters from compromise settlements. On June 7, 2019, the RBI stated that borrowers involved in fraud, malfeasance, or wilful default would not be eligible for restructuring.
- Shock to the Banking Sector: The sudden change by the central bank to grant compromise settlements to wilful defaulters has shocked the banking sector. This decision is expected to erode public trust in the sector and undermine depositor confidence.
- Misuse of Restructuring: Bankers argue that there is evidence of banks and corporates misusing restructuring to "evergreen" problem accounts and maintain low levels of reported non-performing assets (NPAs). Between 2000 and 2014, companies utilized fresh loans from banks to artificially improve their loan books, but the enactment of the bankruptcy code reduced such practices.
- Low Recovery and Implications: Despite the decline in evergreening due to the bankruptcy code, recovery rates have remained significantly low. Granting compromise settlements to wilful defaulters may further hinder the recovery process.
6. Wilful Default and Defaulters in India - Key Statistics
- Definition of Wilful Default: As per RBI's classification, a wilful default occurs when a borrower fails to meet repayment obligations despite having the capacity to do so.
- Increase in Wilful Default Accounts: Wilful default accounts in India have increased over the years. In December 2022, there were 15,778 wilful default accounts involving Rs 340,570 crore, compared to 14,206 accounts involving Rs 285,583 crore in December 2021 and 12,911 accounts involving Rs 245,888 crore in December 2020 (data from Transunion Cibil).
- Leading Banks and Amounts: State Bank of India (SBI) leads with 1,883 wilful default accounts amounting to Rs 79,296 crore. Other banks with significant wilful default amounts include PNB (Rs 38,360 crore), Union Bank of India (Rs 35,266 crore), IDBI Bank (Rs 23,601 crore), and Bank of Baroda (Rs 23,879 crore) (data from Cibil website).
- The dominance of Public Sector Banks: Public sector banks account for 85% of wilful defaults, totaling Rs 292,666 crore. This indicates the reluctance of borrowers to repay bank loans despite having the financial capacity to do so.
- Characteristics of Wilful Default: A wilful default occurs when borrowers divert funds, siphon off funds, or misuse the finances for purposes other than those specified. It also includes unauthorized disposal or removal of assets pledged as security for term loans, without the knowledge of the bank.
7. Importance of Debt Recovery and Impact on Interest Rates
- Protection of Depositors and Stakeholders: Recovery of debts due to banks is crucial for safeguarding the interest of depositors and stakeholders. Failure to recover non-performing assets (NPAs) would ultimately result in the suffering of depositors and other stakeholders.
- The objective of Compromise Settlements: Compromise settlements should prioritize the maximum recovery of dues with minimal expenses and in the shortest possible timeframe, according to a note by the Union Bank of India. The underlying objective is to protect the interest of taxpayers and the general public considering that banks are public sector entities.
- Consideration of Public Interest: As banks are public sector entities, compromise settlements should prioritize the interest of the public at large over the borrowers. The stakeholders, including the taxpaying general public, should be kept in mind during negotiations.
- Impact on Interest Rates: The high level of NPAs in the banking system is one of the reasons for the high-interest rates in India. Resolving and reducing NPAs through effective debt recovery measures would contribute to stabilizing and potentially lowering interest rates in the country.
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For Prelims: Reserve Bank of India (RBI), Non-Performing Assets (NPA's), Willful Defaulters, All India Bank Officers' Confederation (AIBOC), All India Bank Employees Association (AIBEA).
For Mains: 1. Discuss the significance of debt recovery in protecting the interests of depositors and stakeholders and its impact on interest rates in the Indian banking system. (250 words)
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Previous year Questions
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1. Consider the following statements: Non-performing assets (NPAs) decline in value when (UPSC ESE 2018)
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 the merger of units.
Which of the above statement are correct?
A. 1, 3, and 4 only
B. 1, 2 and 4 only
C. 1, 2 and 3 only
D. 1, 2, 3 and 4
Answer: C
2. Which of the following sectors contribute in recent years to the deterioration of asset quality of commercial banks by way of Non-Performing Assets? (UPSC CAPF 2020)
1. Agriculture and allied sector
2. Industrial sector
3. Infrastructure sector
4. Information technology sector
Select the correct answer using the code given below:
A. 1 and 2 only
B. 2 and 3 only
C. 1 and 4 only
D. 1, 2, 3 and 4
Answer: B
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Source: The Indian Express
