1. Reserve Bank of India tightens norms for errant borrowers

Reserve Bank of India tightens norms for errant borrowers

Redefines ‘non-cooperative borrower’; to kick in at R5 cr

By: | Mumbai | Updated: December 23, 2014 1:32 AM
 Reserve Bank of India (RBI) on Monday put out a set of revised guidelines on how lenders should deal with ‘non-cooperative’ borrowers. (PTI)

Reserve Bank of India (RBI) on Monday put out a set of revised guidelines on how lenders should deal with ‘non-cooperative’ borrowers. (PTI)

Even as bankers struggle to recover dues from errant borrowers, grappling with an inefficient legal system, the Reserve Bank of India (RBI) on Monday put out a set of revised guidelines on how lenders should deal with ‘non-cooperative’ borrowers.

The modified definition of non-cooperative borrower, it would appear, is a lot similar to that of a ‘wilful defaulter’.The RBI has characterised a non-cooperative borrower as one “who does not engage constructively with his lender by defaulting in timely repayment of dues while having ability to pay, thwarting lenders’ efforts for recovery of their dues by not providing necessary information sought, denying access to assets financed and collateral securities, obstructing sale of securities”.

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“In effect, a non-cooperative is a defaulter who deliberately stonewalls the efforts of lenders to recover their dues,” the central bank said on Monday, asking lenders to put in place a transparent mechanism for classifying borrowers as such.

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The threshold exposure, per bank, for declaring a company as non-cooperative has been set at R5 crore.

The central bank continues to allow lenders to take on fresh exposure to non-cooperative borrowers but at the cost of making higher provisions. Higher provisions are also required to be made against fresh loans given to even those companies managed by the any directors of the non-cooperative borrowing company.

“However, for the purpose of asset classification and income recognition, the new loans would be treated as standard assets,” the RBI said. The central bank bars lenders from taking on fresh exposure to wilful defaulters, bankers point out.

Earlier, in September, governor Raghuram Rajan had observed that non-cooperative borrowers were those that resisted repaying at every corner, holding up the process. “From a prudential perspective, they impose a cost to the system because banks cannot get their money using the existing laws such as Sarfaesi,” Rajan said.

Rajan has pointed out that the amounts “banks recover from defaulted debt is both meagre and long-delayed”. In FY14, Rs 30,590 crore was recovered via debt recovery tribunals while the outstanding value of debt sought to be recovered was Rs 2.36 lakh crore. Worse, Rajan added that while the law stipulates that cases before the DRT have to be disposed of in six months, only a fourth of cases meet this criteria, “suggesting a four-year wait even if the tribunals focus only on old cases”. According to RBI data, loans worth more than Rs 2 lakh crore were pending at 33 DRTs till FY14, up from Rs 1.43 lakh crore in FY13.

K Subramanyam, executive director at Union Bank of India, pointed out that the non-cooperative borrower would be like a precursor to a wilful defaulter tag. “The wilful defaulter provision would be simultaneously used as these are two different types of borrowers,” Subramanyam explained.

By imposing the higher provisions, the central banks is discouraging banks from taking on additional exposure to errant borrowers, analysts said. Bankers have pointed out that the some borrowers delay the legal proceedings by continuously appealing for stays in the tribunals.

Banker’s efforts to recover dues from errant borrowers have been stymied by the courts. In September, the Gujarat High court had deemed the RBI’s wilful default guidelines as “unconstitutional” and had asked the RBI to modify the same. The court said the circular was in violation of the RBI Act or the Banking Regulations Act, 1949. “The circular that confers uncanalised, unbridled and untrammelled power upon the banks to decide the future of any borrower and makes the bank a judge in its own cause and also the decision whether the other banks should lend money to the borrower declared as a wilful defaulter,” the court had said in its judgement. Following the court order, Rajan said that the central bank would alter the definition of a wilful defaulter to accommodate the concerns of the court.

  1. I
    indiyanesan
    Dec 23, 2014 at 4:45 pm
    Indian Banking system stinks with NPAs - both at the financial portfolio level and the operations level - RBI should first recommend to the Govt to probe all loan sanctions by the erstwhile Directors (including CMDS) of all Public Sector Banks since 1980- these guys are the real culprits behind the present day "default' by borrowers - the Directors were chamchas of the Finance Minister or other powerful politicians in the ruling party and hence got appointed as CMD/ED/Director - with quid pro quo of sanctioning loans linked to ruling party politicians -either directly or indirectly. Can RBI prescribe norms for appointment of Directors ? Why should legal action be initiated against the borrower only ? why should the Directors be allowed to scot-free - after all they have not given loan FROM THEIR OWN RY / FEES. THEY HAVE INSTEAD SQUANDERED ILLEGALLY the hard earned public money and they deserve to be punished like any other criminal - law has to be equal
    Reply
    1. I
      indiyanesan
      Dec 23, 2014 at 4:45 pm
      Indian Banking system stinks with NPAs - both at the financial portfolio level and the operations level - RBI should first recommend to the Govt to probe all loan sanctions by the erstwhile Directors (including CMDS) of all Public Sector Banks since 1980- these guys are the real culprits behind the present day "default' by borrowers - the Directors were chamchas of the Finance Minister or other powerful politicians in the ruling party and hence got appointed as CMD/ED/Director - with quid pro quo of sanctioning loans linked to ruling party politicians -either directly or indirectly. Can RBI prescribe norms for appointment of Directors ? Why should legal action be initiated against the borrower only ? why should the Directors be allowed to scot-free - after all they have not given loan FROM THEIR OWN RY / FEES. THEY HAVE INSTEAD SQUANDERED ILLEGALLY the hard earned public money and they deserve to be punished like any other criminal - law has to be equal
      Reply
      1. P
        Pradipta
        Dec 23, 2014 at 4:21 am
        When ever a bank feels a borrower as non-cooperative or as a wilful defaulter, the name should be reported to the RBI and any bank going to finance any loan should check this list before financing. In this list the persons behind the borrower in case it is not an individual, should also be enlisted. It shall be the responsibility of the borrower to explain his position to the RBI. With the consent of the bank to which he has defaulted RBI can get his name deleted from the list. This simple exercixe shall have miraculous impact on the recovery aspect. When one knows that he can not get a nother loan if he defaults he has to be serious in project preparation, presanction exercise and implementation of the project. Situation beyond his control may be an exception for liberal consideration of the complaining bank but under any cirstance the other bank has to clear the debts of the bank to which the borrower has defaulted and after that it can finance.
        Reply
        1. S
          Srinivas
          Dec 23, 2014 at 12:43 pm
          this will impact very severely to the small and medium borrowers as it is credit flow is pathetic thanks to CIBIL, whimsical bankers can har the SME sector most. hope RBI GOV takes note of this.
          Reply

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