Wilful defaulters to be in focus, says RBI governor Raghuram Rajan

Written by fe Bureau | Mumbai | Updated: Aug 7 2014, 06:51am hrs
Raghuram Rajan?We are trying to ensure that wilful defaulters are prevented from accessing all kinds of funds,? said RBI Governor Raghuram Rajan. (Reuters)
The Reserve Bank of India (RBI) plans to crack down on errant borrowers with stricter guidelines on wilful defaulters ensuring they are not allowed to access funds from other sources like the capital markets, governor Raghuram Rajan said on Wednesday.

To this end the RBI will work closely with the capital market regulator. It will also gradually tighten prudential lending norms for banks to individual companies and corporate groups to minimise systemic risk.

Speaking to the media a day after the central banks monetary policy announcement, Rajan said the ceiling for foreign investments into the bond markets would be eased over a period of time, adding that the recent changes in the rules were aimed at attracting longer-term money.

We are trying to ensure that wilful defaulters are prevented from accessing all kinds of funds, Rajan said, adding that the central bank would also be revisiting the definition of non-cooperative defaulters. The idea is to ensure promoters do not hold up payments once the law suggests they should pay. The RBI, which has put in place a mechanism to alert banks on potential bad loans, is coaxing them to perfect their systems and collate the data so that they are able to spot trouble early on.

A borrower is a wilful defaulter if he has not met repayment obligations even when he has the capacity to do so or has not utilised the money from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. Banks must report cases of wilful defaults to the RBI where the loan outstanding is R25 lakh and above.

Noting that the current account deficit was in control, the governor said there was no room for complacency in the event of a turn in the interest rate cycle overseas, which would result in some volatility. Reiterating the need to tame inflation, the governor noted that a repo rate cut cut by the RBI would not necessarily result in banks lowering their lending rates meaningfully since they would be reluctant to drop deposit rates given that inflation remained elevated.

Moreover, high inflation resulted in the currency depreciating, with the weakening not always balanced and tempered.

The governor said inflation-indexed bonds would be relaunched, possibly with changes that would make the product more attractive. He said investors might prefer regular interest rate payments and coupons that were more attractive.