Evicting promoters who wilfully default on loans will not suffice, say bankers

While the Reserve Bank of India may want banks to evict from the enterprises promoters who wilfully defaulted on loans, bankers say it may not make much difference to the promoters’ fortunes as they would have already feathered their own nest using bank funds.

To make promoters of such companies pay for their misdemeanours, just evicting them may not suffice. The personal guarantee that they gave banks at the time of procuring loan must continue even after their exit, said a senior public sector bank official.

“If banks lean on them, promoters of defaulting companies will wash their hands off their ventures. But then they should not be let off the hook so easily.

“If the personal guarantee that these promoters have given is continued even after they quit the company, they will become liable for the loan that is in default. Such a move can deter wilful defaults in the future,” said the banker.

According to the Reserve Bank of India, a wilful loan default includes deliberate non-payment of dues despite adequate cash flow and good net worth; siphoning off of funds to the detriment of the defaulting unit; and assets financed either not being purchased or being sold and proceeds mis-utilised.

Misrepresentation and falsification of records, disposal/removal of securities without bank’s knowledge, and fraudulent transactions by the borrower too constitute wilful default.

A senior IDBI Bank executive observed that personal guarantee will act as a Damocles’ sword on the heads of promoters, whose companies have wilfully defaulted on loans. Hence, they will make all efforts to keep their enterprises afloat.

The clause on continuing with the personal guarantees should be incorporated in the RBI’s ‘Framework for Revitalising Distressed Assets in the Economy’, he added.

According to a senior Bank of Baroda official, the personal guarantee of the promoter should also be continued in case he decides to exit his enterprise, which is under stress or is undergoing debt restructuring.

When he took charge of the RBI on September 4, 2013, Raghuram Rajan said promoters do not have a divine right to stay in charge regardless of how badly they manage an enterprise, nor do they have the right to use the banking system to recapitalise their failed ventures.

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