Financial Daily from THE HINDU group of publications
Wednesday, Jun 05, 2002
Money & Banking
RBI & Other Central Banks
Markets - Regulatory Bodies & Rulings
RBI ropes in SEBI to tackle rogue borrowers -- Redefines `wilful default'
MUMBAI, June 4
TO deal with the persistent problem of rogue borrowers, the Reserve Bank of India today redefined the term "wilful default'' and issued comprehensive guidelines to be followed by banks and financial institutions.
The central bank will henceforth also share information on wilful defaulters with the Securities and Exchange Board of India (SEBI) to prevent them from accessing the capital markets. Entities figuring on the list of wilful defaulters will get no additional facilities from any bank or financial institution.
Promoters and entrepreneurs of companies where banks or FIs have identified diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from accessing finance from all lending entities and also from floating new entities for five years from the date their names appear on RBI's list of wilful defaulters, the central bank said.
Based on the report of the working group on wilful defaulters headed by Mr S.S. Kohli, the central bank has now said that a wilful default would be said to have happened if the borrowing unit fails to meet repayment obligations to its lenders even when it has the capacity to honour the obligation or diverts borrowed funds for purposes other than they were availed for.
If a unit siphons off funds without using them for the purpose they were availed for and the funds are not available with the unit even in the form of other assets, it would be considered wilful default, the RBI said.
For monitoring end-use of funds, lenders should keep a close watch on assets given as security and do meaningful scrutiny of quarterly progress reports and balance sheet of borrowers.
The regulator said banks and FIs should adopt, wherever possible, a proactive approach for a change in management of the wilfully defaulting borrowing unit. FIs should include a covenant in loan agreements to prevent directors of declared wilful defaulters from getting a place on the board of the borrowing company.
According to the RBI, diversion of funds would be when short-term working capital funds are used for long term purposes, loan funds are deployed in assets other than that they were intended for, and transferring money to subsidiaries or 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, investment in other companies' equity or debt without lenders' approval or shortfall in deployment of funds vis-a-vis amounts disbursed and the difference not accounted for would also be considered diversion of funds, the RBI said.
Even though the regulator has left it to the judgment of the lender to decide based upon the facts and circumstances of individual cases whether a borrower has siphoned off funds, it has been broadly defined that when funds are utilised for unrelated operation of the borrower to the detriment of the financial health of the entity or the lender, it would constitute siphoning off of funds.
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