Verdict on Vijay Mallya default case today; know who is a ‘wilful defaulter’

By: | Updated: March 7, 2016 12:17 PM

According to reports, the 1,164 borrowers catergorised as wilful defaulters by SBI owe the bank nearly Rs 11,700 crore, while Punjab National Bank has Rs 10,869 crore locked with 904 borrowers categorised as wilful defaulters.

Loan default caseLoan default case: Vijay Mallya is in a soup as lenders have have filed a case against the industrialist for debts of Rs 7,800 crore owed to them by him and Kingfisher Airlines. (Reuters)

The Reserve Bank recently revealed that bad debts of the 29 public sector banks aggregated Rs 1.14 lakh crore between 2013 and 2015. A large portion of these bad loans could be falling within the ‘wilful default’ category.

Vijay Mallya is in a soup as lenders have filed case of wilful default against the industrialist for debts of Rs 7,800 crore owed to them by him and Kingfisher Airlines (airlines promoted by him), there are many others borrowers on the wilful defauters list of lenders.

Figures of SBI and Punjab National Bank, the two banks which have initiated action against Mallya, are startling. According to reports, the 1,164 borrowers catergorised as wilful defaulters by SBI owe the bank nearly Rs 11,700 crore, while Punjab National Bank has Rs 10,869 crore locked with 904 borrowers categorised as wilful defaulters.

But do you know what constitutes wilful default? Here we explain to you the salient points of RBI’s guidelines on ‘wilful default’ and how such defaulters should be treated.

The RBI scheme on wilful defaults, which has evolved since it was originally framed in April 1999, says that such instances of borrower categorisation should be ‘intentional, deliberate and calculated’ and not for isolated transactions. It should be based on the track record of the borrowers.

Wilful default, including diversion or siphoning of funds, is limited to outstanding balance of Rs 25 lakh or more.

What constitutes wilful default? Keeping this in view, RBI has said wilful default would happen in the following instance:

– The borrower has defaulted even when it has the capacity to honour obligations.
– The defaulting borrower has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
– The defaulter has siphoned off funds so that the funds have not been utilised for specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
– The defaulting borrower has disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the lender.

What constitutes diversion of funds?
– Diversion of funds include:
– Utilisation of short-term working capital funds for long-term purposes
– Deploying borrowed funds for creation of assets other than those for which the loan was sanctioned
– Transferring borrowed funds to subsidiaries/group companies or other corporates
– Routing funds through any bank other than the lender bank or members of consortium without prior permission of the lender;
– No taking lenders’ approval before acquiring equities/debt instruments in other companies
– Not accounting for shortfall in deployment of funds against amounts disbursed or drawn.

What constitutes siphoning of funds?
Siphoning of funds happens when funds borrowed are utilised for purposes unrelated to the operations of the borrower and to the detriment of the financial health of the entity or the lender.

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