RBI has issued a Framework for Compromise Settlements and Technical Write-offs dated 8th June, 2023. This has generated much heat and discussion since the compromise settlements also cover wilful defaulters where the existing norms appears to have been diluted. The current RBI circular says that in respect of borrowers subject to compromise settlements, there shall be a cooling period as determined by the respective Board approved policies before the REs can assume fresh exposures to such borrowers (subject to a floor of 12 months for exposures other than farm credit).
As the current circular does not explicitly mention that the existing guidelines of the cooling period which is 5 years with respect to the wilful defaulters subject to compromise settlement will continue unaltered, the logical inference of the current RBI circular is that the cooling period of 12 months will be equally applicable to wilful borrowers as well. However, on 20th June, 2023 RBI has clarified through its FAQs that the existing cooling period of 5 years for wilful defaulters will remain unchanged and put the matter to the rest.
When a bank arrives at a compromise settlement with wilful defaulters, consent decree to be obtained from the concerned judicial authorities (i.e., Lok Adalats, DRTs, SARFAESI Act, IBC) when recovery proceedings have been initiated already before arriving at such compromise settlement.
As defined by RBI a wilful defaulter is one who has wilfully defaulted the payment of his dues to the bank even though he has the capacity to pay; or one who has wilfully defaulted the payment of his dues and did not utilise the funds borrowed from the bank for the intended purpose but has diverted the funds to other activities; or one who has wilfully defaulted the payment of his dues and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets; or one who has defaulted his dues to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.
Therefore, intention to cheat the bank followed by an act that results in financial loss to the bank even though the borrower has the ability to repay the debt is termed as wilful default. This attracts criminal liability. When the bank agrees for a compromise settlement with such wilful defaulters who have an intention to cheat the bank despite having the money to repay, the public trust and confidence on the banking system will certainly get eroded.
Though the current RBI circular which reiterates its earlier stand says such compromise settlements entered by the banks with wilful defaulters is to be without prejudice to the criminal proceeding underway against such debtors, for all practical purposes it will only result in putting the things under the carpet. The instances where the banks had gone ahead and recovered additionally the dues after technical write offs and after the resolution of the compromise settlements with wilful borrowers are not very significant.
Historical data on wilful defaulters
India’s top 50 wilful defaulters owed Rs 9,2570 Crs to the country’s banks as on March 31, 2022, the government said in Parliament on December 19 2022, citing RBI data. In 2018, the Central Information Commission had asked the government and the RBI to disclose the list of wilful defaulters. In April, 2019 the Supreme Court granted the central bank an opportunity to disclose the list saying that the RBI is in contempt of this court by withholding disclosure of such information. In November, 2019 RBI reluctantly disclosed in response to an application filed by an online news site, the names of 30 wilful defaulters who collectively account for Rs. 50,000 Crs of outstanding dues. In June, 2019 State Bank of India revealed the names of 10 large firms, declaring them as ‘wilful defaulters.’
The amount owed by wilful defaulters to the banks which was Rs. 39,504 Crs in March, 2014 rose to Rs. 1,61,213 Crs in December, 2018. According to the information obtained by Pune based Mr. Vivek Velankar under RTI, the data of wilful defaulters as on 31 st December, 2021 is as under:
Wilful defaulters as on 31 st December, 2021
| No. of accounts | Amount in INR Crs |
| 2237 | 1,84,863.32 |
| 41 | Nil |
| Total – 2278 | Total 184,863.32 |
Out of the above, 312 accounts owe Rs.1,41,583.20 Crs. 26 big defaulters collectively owe Rs. 60,425.71 Crs to PSBs.
Data of wilful defaulters Rs. 25 lakhs and above as on 31.5.2023
| Institutions | No of accounts | Total amount in Crs |
| Cooperative banks | 38 | 131.50 |
| Financial institutions | 51 | 411.87 |
| Foreign banks | 8 | 166.68 |
| Nationalised banks | 1764 | 29835.99 |
| Private banks | 1289 | 30563.14 |
| Grand Total | 3150 | 61109.17 |
(Source- (TransUinon cibil).
Amounts written off by PSBs during 2017-18 to 2021-22 Rs.7,34,740 crs. Whereas in the similar period recovery from written off by PSBs amounted to Rs. 1,03,048 Crs and additional capital infused into PSBs by the Government amounted to Rs 2,86,043 Crs. In other words, the dent in the reserves of PSBs during the period 2017-18 to 2021-22 amounts to Rs.3,45,665 Crs, which is a huge sum by any standards.
After introducing the IBC (Insolvency and Bankruptcy Code, 2016) which is intended to expedite the process of settlement of insolvency and bankruptcy proceedings, between December, 2016 and March, 2021 under IBC, overall sacrifice or haircut taken by the banks was 61%. Section 29A of the Insolvency and Bankruptcy Code, 2016, precludes a wilful defaulter to approach for resolution under IBC. The reason is the IBC Code is intended for corporate debtors who are unable to pay off their pending debts due to their financial incapacity and not to wilful defaulters who fraudulently try to evade their liability to pay debts despite having the financial capacity to do so.
Similarly, courts have clarified by various judgements that the declaration of the moratorium by the adjudicating authority on the insolvency commencement date prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority as specified in section 14 of IBC are not applicable where such corporate debtors are wilful defaulters. In other words, the corporate creditors do not lose their legal rights to proceed against the wilful defaulters criminally while initiating the resolution process under IBC.
Courts have also concurred with the RBI guidelines on the categorisation of wilful defaulters and have not entertained any petitions from such wilful defaulters seeking injunction against the action initiated by banks consequent to such categorisation as wilful defaulters.
For effective action against wilful defaulters fleeing Indian jurisdiction, the Fugitive Economic Offenders Act, 2018 has been enacted by the GOI to provide for attachment and confiscation of property of fugitive offenders and has disentitled them from defending any civil claim.
GOI had advised PSBs:
- To decide on publishing photographs of wilful defaulters, in terms of RBI’s instructions and as per their Board-approved policy.
- To obtain certified copy of the passport of the promoters/directors and other authorised signatories of companies availing loan facilities of more than Rs. 50 crore.
Heads of PSBs have been empowered to request for issue of Look Out Circulars.
Most of the wilful defaulters are obviously those who have political clout and managed to get large loans from the banks (particularly from PSBs) in the first place and have wilfully defaulted with political backing.
Though, stringent laws have been introduced initiation of action by the banks (particularly PSBs) for enforcement of the law is not done swiftly in a timely manner. Complex internal procedures, political pressure and staff accountability are some of the constraints in this regard. Finally, laws can only try to plug the loopholes to prevent opportunity from committing frauds. However, laws can not reform the bad intention of fraudsters and that is possible only through nurturing values by the parents and the schools in the childhood.
Reference:
- RBI/2023-24/40 DOR.STR.REC.20/21.04.048/2023-24 dated June 08, 2023.
- https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12513&Mode=0#AN.
- https://suit.cibil.com/loadSuitFiledDataSearchAction.
- https://rbi.org.in/commonman/English/Scripts/FAQs.aspx?Id=3459.
- https://www.pib.gov.in/newsite/PrintRelease.aspx?relid=192146.
