The RBI has been initiating every effort to ensure that wilful default should not adversely affect the health of the banking system.
The beginning of measures against wilful default started in 1999 when the Central Vigilance Commission’s instructions for collection of information on wilful defaults of Rs.25 lakhs and above. Since then, the RBI has asked banks and notified Financial Institutions to submit information on wilful defaulters.
Several modifications were made in the identification of wilful defaulters and the procedures that should be initiated against them. Recently, with the rising NPAs with the banking system, the case of wilful default is getting increased attention.
Who is a wilful defaulter?
Simply, default means non-payment of a loan availed by a borrower. A willful defaulter is an entity or a person that has not paid the loan back despite the ability to repay it.
Areas covered under wilful default
As per the RBI regulations, willful default covers several broad areas: Deliberate non-payment of the dues despite adequate cash flow and good networth, Siphoning off of funds to the detriment of the defaulting unit, Assets and proceeds have been misutilised; Misrepresentation / falsification of records; Disposal / removal of securities without bank’s knowledge; Fraudulent transactions by the borrower.
What is wilful default?
Though willful default covers the above mentioned broad areas, major instance is non-repayment of loan availed despite the ability to pay the loan. Hence, it is in the sense of non-repayment of debt that willful default is seriously defined.
A ‘wilful default’ would be deemed to have occurred if any of the following events is noted:
(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to repay.
(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and 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.
(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also 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 bank / lender.
According to the RBI regulations, the identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions / incidents. The default to be categorised as wilful must be intentional, deliberate and calculated.