RBI tightens norms to deal with non-cooperative borrowers

The Reserve bank of India tightened rules on companies who default on their loans repayments, by allowing banks to classify them as non-cooperative, making it difficult for such entities to get any fresh loans.

“If any particular entity is reported as non-cooperative, any fresh exposure to such a borrower will by imply greater risks for banks and necessitate higher provisioning “as applicable to substandard assets in respect of new loans sanctioned to such borrowers as also new loans sanctioned to any other company that has on its board of directors any of the whole time directors/promoters of a non-cooperative borrowing company or any firm in which such a non-cooperative borrower is in charge of management of the affairs,” the RBI said in a notification.

However, for the purpose of asset classification and income recognition, the new loans would be treated as standard assets, the central bank said.

The RBI has set Rs 5 crore as the cut off limit for classifying borrowers as non-cooperative.

RBI has defined a non-cooperative borrower as “one who does not engage constructively with his lender by defaulting in timely repayment of dues while having ability to pay, thwarting lenders’ efforts for recovery of their dues by not providing necessary information sought, denying access to assets financed / collateral securities, obstructing sale of securities, etc. In effect, a non-cooperative borrower is a defaulter who deliberately stone walls legitimate efforts of the lenders to recover their dues”.

A non-cooperative borrower in case of a company will include, besides the company, its promoters and directors (excluding independent directors and directors nominated by the Government and the lending institutions). In case of business enterprises (other than companies), non-cooperative borrowers would include persons who are in-charge and responsible for the management of the affairs of the business enterprise, RBI said.

The new norms will not only apply for individuals or promoters but for directors of such companies also, excluding independent directors and directors nominated by the Government and the lending institutions.

Banks will be required to put in place a transparent mechanism for classifying borrowers as non-cooperative and should be entrusted to a Committee of senior officials headed by an Executive Director and two other senior officers such as General and Deputy General Managers. The decision should also be reviewed by another committee headed by the Chairman/CEO and MD along with two independent directors. The committee can allow the borrower for a personal hearing if the committee feels so.

Bank boards should review the status of non-cooperative borrowers every six months to decide if it can be declassified depending on the borrowers’ return to credit discipline and cooperative dealings. The removal of such names should be separately reported with adequate reasoning, the banking regulator said.

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