Degrees of default

Robert Frost once said, “A bank is a place where they would lend you an umbrella in fair weather and ask for it back when it begins to rain.” In a perfect banking market, bankers lend and borrowers pay back the amount lent in due course of time. But no market is perfect. Consequently, some borrowers pay and some don’t. If both the quality and quantity of borrowers who don’t pay increases, the bank starts to panic.

Normally, a borrower does not repay a loan due to a genuine inability to pay, a temporary cash flow mismatch impacting his desire to pay or a permanent unwillingness to pay. The Reserve Bank of India (RBI) labels the last category as wilful defaulters — though it would be almost impossible to prove intentional or wilful unwillingness to pay. As a part of its framework for revitalising distressed assets in the economy, the RBI recently announced instructions to classify borrowers as “non-cooperative” borrowers.

Non-cooperative borrowers A non-cooperative borrower is 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 dues — basically a defaulter who deliberately stonewalls legitimate efforts to recover 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 lending institutions). In the case of business enterprises (other than companies), non-cooperative borrowers would include persons in charge and responsible for the management of the affairs of the enterprise.

The instructions envisage a two-committee process to label a borrower as non-cooperative. While this detailed procedure could be useful, it could delay the classification. A single high-powered committee could do the job, and it would probably be a good idea to invite the statutory auditors to this committee as they are the ones that go through the asset classification norms with a fine-tooth comb.

The intention The banks should send a show-cause notice to the borrower asking why he should not be christened non-cooperative. Banks should insist on a time limit for the borrower to respond to this failing which his loan account would be classified as non-cooperative. Half-yearly reviews of the status are to be done.

Once the label has been stuck on a borrower, additional loans as also new loans sanctioned to the borrower or any other company that has on its board 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 will entail higher provisioning norms and the loans would be priced higher.

It is apparent that the intention behind the instructions for classifying a borrower non-cooperative is two-fold: one is to exert pressure on the borrower to cough up the amount owed and the other is to ensure that he does not lead a comfortable life in the world of debt.

To ensure that this is implemented, banks should commence by making public the names of a few borrowers whom they have classified as non-cooperative. This would also stop the general feeling that nothing would ever happen to a well-heeled borrower who has taken care of his banker. Bankers should not agree to a small credit in the borrowers’ account to buy peace for a couple of years. This is the sub-text that the RBI has written in its instructions.

The writer is a chartered accountant

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