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”.
“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.
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.