Treat them alike

Aiming to ensure a better credit management system, the RBI has advised financial institutions to classify non-cooperative borrowers out of its non-performing assets. Even before these guidelines are put in place, there comes another classification, of wilful defaulters. There are similarities and differences between the two.

Classification of wilful defaulters is an off-shoot of an initiative from the Central Vigilance Commission, whereas classification of non co-operative borrower is an RBI initiative. The cut off amount for classification of wilful defaulters is ₹25 lakh, while it is ₹500 lakh for non-cooperative borrowers.

Wilful default arises where there is no repayment of the advance even when the borrower has the capacity to repay. There may be diversion or siphoning of funds or removal of assets from the unit.

Non-cooperative category arises when there is no repayment and the borrower does not provide information to the bank or does not allow access to assets financed, or obstructing sale of securities or stonewalls legitimate efforts of banks to recover dues.

In both cases, the category has to be decided by a committee comprising of high level officials of the bank and sufficient opportunity has to be given to borrowers to explain their position.

In the case of wilful defaulters, no additional facility can be extended and no finance can be availed of from other institutions for five years when promoters or entrepreneurs with the wilful default tag are involved.

Even though non-cooperative borrowers are not barred from further finance, banks may have to make higher provision due to greater risk.

Banks must provide the list of wilful defaulters to market regulator SEBI and the Credit Information Bureau (India). They must provide the list of non co-operative borrowers to Central Repository of Information on Large Credits.

The objective of the exercise of classification of non-cooperative borrowers is to put pressure on borrowers to repay the loans and advances and reduce NPAs. But things are not that simple. If the financing bank is not allowed to inspect its assets, it is a breach of contract.

But the RBI has not suggested any legal action to be initiated. The borrower can continue with the existing facility as no recall of advance has been suggested. Even sanctioning of a further limit has not been not curtailed; only a higher provision has been advocated. Higher provision means lesser profit for the bank or higher borrowing cost to the non-cooperative borrower.

It is not clear why there should be soft pedalling with the non-cooperative borrower. Today’s non-cooperative borrower will be tomorrow’s wilful defaulter. The central bank must advocate to initiate criminal action against non-cooperative borrowers as well.

The need of the hour is strict measures on the borrowers who are misusing bank finance. Such action will have deterrence effect on other borrowers. The RBI Governor has recently stressed the need to bring big fraudsters and defaulters to justice quickly and in a transparent manner. When one appreciates the intention of the central bank, the direction on non co-operative borrowers falls short of expectations.

The writer is a retired banker

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