Wilful Defaulter Norms - A New Trend

Abstract: Entities classified as Wilful Default can repay loans, but instead misappropriate, divert, or sell the mortgaged assets without the banks' consent. The statistics highlight the need for a thorough investigation of the matter; it is imperative to examine the phenomena and determine the cause of such blatant and widespread conduct of borrowing and wilfully failing to return.

Finding and comprehending the legal ramifications of deliberate default is the goal. With content analysis from secondary sources such as the Companies Act of 2013, the Insolvency and Bankruptcy Law of 2016, the Recovery of Debts Due to Banks and Financial Institutions Act of 1993, the Securities and Exchange Board of India Act, and RBI Master Circular, the study is descriptive.

The study concludes that different laws have low penalties and are contemporaneous with one another. Only the Companies Act of 2013 has a more severe punishment than others. Furthermore, precautionary steps for the banks have been proposed.

Introduction

Globally, the banking sector's expansion plays a pivotal role in driving a country's economic advancement. Banks are crucial in supplying financial resources, particularly to industries like infrastructure, automobiles, iron and steel, and others that require substantial capital. In emerging economies, banks carry the added responsibility of fulfilling the government's social agenda, making them more than mere financial intermediaries.

Due to this intertwined connection between banking and economic progress, the overall economy's growth is closely linked to the banking industry's well-being. Non-Performing Assets (NPAs) serve as a critical indicator for assessing the financial soundness of the banking sector. Beyond reflecting asset quality, NPAs symbolize credit risk management effectiveness and resource allocation efficiency.

Wilful defaults have emerged as a significant contributor to the escalating Non-Performing Assets (NPAs) within Indian banks. Particularly in the aftermath of the financial crisis, a noticeable trend has been the concurrent increase in wilful defaults, mirroring the upward trajectory of NPAs. This worrisome trend has become a primary source of apprehension for Indian financial institutions.

In light of this context, this article aims to conduct a comprehensive analysis of the current state of wilful defaults concerning NPAs in the country. This analysis will explore the ramifications of wilful defaults across various sectors and endeavour to propose concrete measures to mitigate the growth of non-performing assets in the future.

In June 2019, India ranked 52nd out of 189 countries in the World Bank’s Index on Ease of Resolving Insolvencies survey; it takes more than 4 years to resolve the issues of insolvency in India with a recovery rate of 26.4%. This factor is a big deterrent to foreign investors and budding entrepreneurs in the country. With the introduction of the Insolvency and Bankruptcy Code, 2016, the government has constituted the Insolvency and Bankruptcy Board of India (IBBI) which enables creditors to liquidate the funds from the defaulted entity in 270 days.

This has worked as a positive reinforcement to foreign and domestic investors too. In 2017, India’s rank improved to 63 rank in the Ease of Doing Business Index from 72nd rank in the previous year. The major reason for such a steep hike is credited to the introduction of the Insolvency and Bankruptcy Code.

India’s insufficient measures to resolve bankruptcy problems, significant inefficiencies and systemic abuses are some of the reasons for the infirm state of credit markets in India. With the introduction of the Insolvency and Bankruptcy Code, 2016 an era of overarching reforms was anticipated with a thrust to creditor-based insolvency. The code is a few months old and has faced many teething problems; like bids being made by promoters of defaulting companies.

It had to be amended right during the case of Essar Steel bided by Numetal, a part of the stake is owned by the Director of Essar Steel, Mr. Prashant Ruia, this was viewed as a conflict of interest and hence amended. There is a strong connection between the Bankruptcy Code and Non-Performing Assets (NPA). The situation with NPA in India has been so far the worst in history (ET, 2016). However in 2023, due to various government efforts, the GROSS BAD LOANS of Indian banks fell to 10 years low at 3.9%.

History

The Reserve Bank of India ("RBI") established a reporting system in 1986 to instil financial responsibility in credit institutions through its Circular No. 145, dated August 20, 1986. The Central Vigilance Commission ("CVC"), acting by the powers and duties bestowed upon it by Section 8(1)(h) of the CVC Ordinance of 1998, issued instructions on November 27, 1998, on "Improving Vigilance Administration in Banks," which included a directive to financial institutions ("FIs") to report cases of "wilful default," to slow down the sharp increase in non-performing assets ("NPA").

By Scheme dated 01.04.1999, the RBI implemented guidelines that mandated all banks and financial institutions to report instances of "wilful default" of Rs. 25.00 Lakhs and above to the RBI every quarter, under the Central Vigilance Commission's guidelines (" Scheme of 1999 ").

This expanded the definition of "wilful default" to include intentional non-payment of debt despite having a healthy cash flow and net worth, diverting funds away from the defaulting unit, falsifying or misrepresenting records, removing or disposing of securities without the bank's knowledge, and engaging in fraudulent activity on the part of the borrower.

The RBI also informed the credit institutions that a default had to be planned, deliberate, and intentional to be classified as "wilful." In light of this, the Parliamentary Committee suggested building a comprehensive database of credit data that would include information on promoters and group companies that have improperly used borrowed funds as well as specifics of willful defaulters. In May 2001, the RBI established a "Working Group on Wilful Defaulters" after consulting with the Indian government.

RBI sent out circulars to lending institutions with directives and guidelines regarding "wilful defaulters" based on the Working Group's recommendation. In addition, in 2001 the Credit Information Bureau (India) Limited (CIBIL) was founded. On June 23, 2005, the Indian government subsequently notified the Credit Information Companies (Regulation) Act, 2005.

Indian courts and tribunals have influenced the development of the law concerning willful defaulters' obligations to lenders. One of the first signals and actions came from the Hon'ble Supreme Court of India in 1998. Following its ruling in the case of Common Cause (A registered Society) v. Union of India & Anr., W.P. (C) No. No. 291 of 1998, the court suggested that the definition of "wilful default" be expanded.

It is quite unexpected that the RBI removed this requirement when it redefined "wilful default" in its circular no. DBOD. No.DL(W).BC./110 /20.16.003(1)/2001-02} on Wilful defaulters and action thereagainst, dated 30.05.2002, superseding the Scheme of 1999.

The Scheme of 1999 stipulated that the removal or disposal of securities without the knowledge of the bank would be one of the transactions triggering "wilful default."

Only in 2008 did the RBI release a statement under the notification number RBI/2007-08/377 UBD.PCB.Cir.No.57/16.74.00/2008-09, dated 24.06.2008, stating that, following the Supreme Court's ruling in the Common Cause (A registered Society) v. Union of India & Anr. (Supra), it had been suggested that the definition of "wilful default" be expanded to include situations in which the borrower has also sold or removed the immovable property or movable fixed assets it provided to obtain a term loan without the lender's knowledge. The meaning of "wilful default" was then modified. The Master Circular, 2006 has undergone numerous revisions over time.

Definition of Wilful Default

The term wilful default has been defined by the Reserve Bank of India in 1999 through a notification, viz., Collection and Dissemination of Information on cases of Wilful Default of Rs.25 lakhs and above and will cover:

• Deliberate non-payment of the dues despite adequate cash flow and good net worth.
• Stealing money at the expense of the defective unit.
• The financed assets have either not been bought or have been sold with the money received being misused.
• Falsifying or misrepresenting records.
• Securities are being disposed of or removed without the lending bank's knowledge.
• Fraudulent transactions by the borrower. The modification was made later in 2002 through the Notification and the activities covered under the instances of siphoning off and diversion of funds were categorically spelt out. (RBI, Notification-DBOD. No..DL(W).BC ./110 /20.16.003(1)/2001-02, 2002).
• Using working capital funds that are short-term for purposes that are long-term and not covered by the sanction. using borrowed money for things other than those for which it was authorized—that is, for the creation of assets or other purposes.
• Transferring money using any method to the Group companies, subsidiaries, or other corporate entities.
• Money transfer via a bank other than the lender bank or consortium members without the lender's prior consent.
• Investment in other businesses through the purchase of debt or equity instruments without the consent of lenders; insufficient funds deployed in comparison to the amounts drawn or disbursed, with the discrepancy going unaccounted for.
• The act of embezzling money: funds obtained from banks or other financial institutions and used for objectives unconnected to the borrower's business operations negatively impact the lender's credit standing. Lenders make the ultimate determination about fund syphoning based on the objective facts and circumstances of each case.

Later, according to the Master circular in the year 2008, after the Hon’ble Supreme Court’s Order relating to writ petition Civil No.291 of 1998 titled Common Cause (A registered society) v. Union of India & Anr of “wilful default”. (RBI, Notifications-DBOD. No..DL(W). BC. 87/20.16.003/2007-08, 2008).

“3(d) the unit has defaulted in meeting its payment/repayment obligation to the lender and has also disposed of or removed the movable fixed assets or immovable property given by it for the purpose of securing a term loan without the knowledge of the bank / lender.” 

In 2014, the definition covered four major reasons for defining a wilful defaulter:

• Capacity to repay but still defaulted in meeting its repayment.
• Diverted the funds for purposes other than those specified in the loan terms.
• Siphoned off the funds, i.e., the funds are neither used in buying assets specified in the loan terms nor other assets.
• Disposed or removed the movable fixed assets or immovable property being collateral to secure a term loan, without the knowledge of the bank/lender.

Legal Regulation of Concept of Wilful Conduct 

RBI Circulars on Wilful Defaulters

The RBI published the Master Circular on Wilful Defaulters in 2015 to compile the suggestions of numerous committees and stakeholders and provide guidance to banks and financial institutions on identifying and handling "wilful defaulters" ("Master Circular"). Additionally, the RBI has suggested creating a Public Credit Registry ("PCR") to compile all information on debtors and willful defaulters.

To give banks and financial institutions (FIs) a complete picture of both current and potential borrowers in real-time, the PCR is designed to incorporate data from organisations such as the Securities and Exchange Board of India ("SEBI"), the Ministry of Corporate Affairs ("MCA"), the Goods and Services Tax Network, and the Insolvency and Bankruptcy Board of India.

Regretfully, lenders sometimes use the threat of being labelled as "wilful defaulters" as a tactic to speed up recovery because of the negative effects of the Master Circular. Thus, lenders attempt to give a purely civil dispute a criminal tint by pretending to follow the Master Circular's guidelines. The RBI has acknowledged these unrelated events, which frequently result in default, in the Master Circular.

The RBI has advised banks not to downgrade the asset classification of borrowers to NPA in cases where their accounts have temporary deficiencies that can be resolved, by paragraph 4.2.4 of the IRAC Norms. However, a legitimate defaulter may also be labelled a "wilful defaulter" at the request of creditors due to the strict terms outlined in the Master Circular, which are intended to speed up recovery. Therefore, the need for the hour is for careful equity balancing to stop such abuse.

The Indian Supreme Court has also been balancing the interests of creditors against the ideas of natural justice, much like a tightrope walker. The Court recognised in the historic case of State Bank of India v. Jah Developers Pvt. Ltd. that severe consequences, with an immediate and direct impact on the rights of the borrowers enshrined under Article 19(1)(g) of the Indian Constitution, are attracted the moment a person is sought to be declared a 'wilful defaulter,' taking into account various equities and other pertinent factors. Thus, among other things, the Honourable Supreme Court ordered or declared:

• Including a second chance for the borrower to be represented or heard (which was also present in the Circular on Wilful Default issued by RBI on 01.07.2013 but was reduced to a single opportunity in the Master Circular). The Court further ordered that the borrower receive notice of the directives from both committees (Paragraph 24 of the judgment) 3. The committees lack the authority of a tribunal, are not endowed with judicial powers, and are not permitted to consider testimony when rendering decisions. Their authority is limited to administrative functions.
• Hearings orally are not required. After taking into account the parties' written representations, a just outcome can be reached (Paragraph 15 of the judgment, now reflected in Paragraph 3 of the Master Circular).

As a somewhat related note, the Hon'ble Supreme Court's ruling in Reserve Bank of India vs. Jayantilal N. Mistry,} where the following was held, may make it impossible for RBI to withhold information if an inquiry is made regarding the list of willful defaulters.

RBI is required to provide the requested information under the terms of the Right to Information Act, 2005 ("RTI Act"), with a few exclusions;

• The RBI does not have a fiduciary relationship with banks or financial institutions; rather, it is required by law to protect the interests of depositors, the general public, the country's economy, and the banking industry.
• Exceptions (paragraph 77 of the judgement): Only information that poses a risk to the country's economy or security may be withheld by RBI. Otherwise, it has a responsibility to carry out its duties with the highest transparency as the principal bank regulator and guardian/custodian of the economy.

The RBI does not have a fiduciary relationship with banks or financial institutions; rather, it is required by law to protect the interests of depositors, the general public, the country's economy, and the banking industry.

Exceptions (paragraph 77 of the judgment): Only information that poses a risk to the country's economy or security may be withheld by RBI. Otherwise, it has a responsibility to carry out its duties with the highest transparency as the principal bank regulator and guardian/custodian of the economy.

Implications to Wilful Defaulters Under the Security and Exchange Board of India

Guidelines SEBI has incorporated the issue of wilful default entities. The SEBI has been prompt in updating the law regarding the wilful defaulter. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Third Amendment) Regulations, 2016, Regulation 4, state that if an issuer, or any of its promoters or directors, is a willful defaulter, the issuer may not publicly issue equity securities. If the issuer or any of its directors or promoters is a wilful defaulter, it must disclose the following information: the name of the bank, the year, the amount owed, the name of the party, any actions taken to remove the party from the list of wilful defaulters, any other disclosures the issuer deems appropriate to help investors make informed decisions, and any other disclosure that the Board of the wilful defaulter entity specifies.

The issuer or any of its promoters or directors is a wilful defaulter and has to be disclosed prominently on the cover page with suitable cross-referencing to the pages.

In the case of listing on the Institutional Trading Platform in an SME Exchange, a wilful defaulter is not allowed to participate. In the cases related to registration as intermediaries, SEBI(Intermediaries) Regulations, 2008 Criteria for determining a ‘fit and proper person’ categorically excludes wilful defaulter entities.

Reserve Bank of India

RBI has amended the penalty or the measures in the case of wilful defaulters, time and again. In the year 1999, after defining wilful default, penalty measures were notified in 2002 and subsequently an addition was made in the year 2003 with a minor change in the definition but nothing was amended for the penalty clause in the year 2008 In the year 2002, the following measures were notified through new notification.

• The listed wilful defaulters should not be given any additional facilities by banks or financial institutions (FIs). They should also be prohibited from receiving institutional financing for new ventures from scheduled commercial banks, Development Financial Institutions, government-owned NBFCs, investment institutions, etc. for five years starting on the date the wilful defaulter's name is published in the RBI's list of wilful defaulters.
• The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary.
• a clause stating that the borrowing company is not permitted to add a director to the board of a business that has been designated as a willful defaulter
• Thereafter, in the year 2003 (RBI, Notification-Wilful Defaulters and action thereagainst, 2003), the following measures were taken by the RBI:
• The breach of trust or cheating construed is clearly defined and is to be treated as a criminal offence.
• Banks are directed to monitor the funds lent closely through fund usage certificates from the borrower.
• to file a criminal complaint under Sections 403 and 415 of the Indian Penal Code (IPC) 1860 against willful defaulters, based on the specific facts and circumstances of the case.

Companies Act, 2013

The relevance of the wilful default case under the Companies Act, 2013 lies in Sections 339 and 348. According to the section regarding information as to pending liquidations, the auditor of the wilful defaulter shall be liable to punishment with imprisonment up to six months or a fine up to one lakh rupees or both.

Under Section 339, Liability for fraudulent conduct of business:

during the process of winding up of a company if the intent surfaces to defraud creditors of the company or any other persons or any fraudulent purpose, then the Tribunal may declare any person as personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as proved.

Section 447 provides for punishment for fraud, it states:

“without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months and which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.”

Insolvency and Bankruptcy Code, 2016

Under Chapter 7 on offences and penalties, punishment for the corporate debtor wilfully concealing, tampering, destroying, omitting, violating either of sections 7, 9, 14, 31, 75, 76 by providing false information, mutilating, mal-practising, gifting, transferring or falsifying any property before twelve months of declaration as bankrupt, then the officer shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to five years, or with fine, which shall not be less than one lakh rupees but may extend to one crore rupees, or both.

During the process of bankruptcy, if the officer of the corporate debtor does not disclose to the Insolvency professional all the details of the property, does not cooperate in the resolution process by not passing important information, or does not produce facts and accounts shall be punishable as stated above. However, over and above that, the imprisonment may extend up to six months and the fine up to five lakhs rupees.

As for the Offences and Penalties for Partnership firms, on default shall be punishable with imprisonment for a term which may extend to one year, or with a fine which may extend to five lakhs rupees or both.

SARFAESI Act, 2002

There has not been specific mention of the term wilful default; however, based on the relevance of Section 27 of the RBI Act,

“penalties for non-compliance of directions of the Reserve Bank of India shall be punishable with fine which may extend to five lakhs rupees and in the case of a continuing offence, with an additional fine which may extend to ten thousand rupees for every day during which the default continues.”

Latest Developments in Wilful Defaulters’ Norms

The Reserve Bank of India (RBI) has issued draft guidelines on the classification of wilful defaulters. The new draft provisions would apply to banks, non-banking financial companies (NBFCs) and all-India financial institutions like the Export-Import Bank of India (Exim Bank) and the National Bank for Agriculture and Rural Development (Nabard).

A borrower can be labelled a wilful defaulter for defaulting on repayments despite having the capacity to make them. This would also include those who have diverted or siphoned off borrowed funds, or who fail to infuse equity despite agreeing to do so. The regulator has proposed to expand the definition of "wilful defaulter" to include borrowers who fail to infuse committed equity, even while having sufficient resources. It has also proposed to include guarantors who, despite being able to meet guarantee obligations, do not do so.

The RBI has mandated lenders to complete classifying and declaring a borrower as a wilful defaulter within six months of the loan being classified as non-performing. Wilful defaulters will not be able to avail of fresh loans for one year after the lender removes them from the list of wilful defaulters.

The treatment of wilful default loans sold to asset reconstruction companies (ARCs) and their status under the Insolvency and Bankruptcy Code are also covered in the draught circular. Before transferring loans to other lenders or ARCs, lenders must conduct wilful default investigations on borrowers, according to the draught circular. Before selling the asset, the lender is required to report any confirmed cases of wilful default to credit information companies and include them in a list of wilful defaulters. By October 31st, regulated entities and other stakeholders are invited to provide comments and feedback to the RBI.

The definition of a wilful defaulter is to be expanded to include the new ground of failure to infuse committed equity even in the presence of adequate resources. The proposed definition also covers guarantors who can fulfil guarantee obligations but choose not to. This section is also included in the current Master Circular. Interestingly, guarantors for wilful defaulters are also wilful defaulters, so it's not just creditors who are at fault.

Procedure for Declaring a Wilful Defaulter

Similar to the current Master Circular, a wilful defaulter must have a current outstanding debt of at least Rs 25 lacs.

Thus, the lender should investigate whether the borrower is a wilful defaulter if the loan is a non-performing asset (NPA) with a current outstanding balance of Rs 25 lacs or more. The entire procedure must be finished within six months of the accounting date becoming non-performing assets (NPAs), which is a maximum of nine months from the borrower's first default date.

The following are the different steps in the process:

• The Identification Committee Recovery team or teams of a similar nature will review the borrower's financial statements, security cover, and other documents to look for any signs of willful default and present the information to the Identification Committee.
• Identification Committee to consider the same and may choose to issue a show-cause notice. Notice
• The amount of time allotted should make sense. There is no deadline specified in the directions, but it is reasonable to consider the borrower's submissions for up to 14–15 days.
• Following consideration, the Identification Committee will submit a proposal, along with written justifications, to the Review Committee for the classification of Wilful Defaulter. Concurrently, this proposal will be conveyed to the guarantor or individuals in charge of overseeing the operations of the aforementioned entity. Following a review of the Identification Committee's findings, the Review Committee may provide notice to the borrower and offer a personal hearing, provided that notice is given within a reasonable timeframe, such as 15 days.
• The borrower's representation and in-person hearing
• rationale for the Review Committee's decision
• Once identified, the lenders must notify all CICs of these Wilful Defaulters every month in Annex II.

Criticism of RBI’s Policy

The proposed directions represent a significant strengthening of the Reserve Bank’s norms on wilful defaulters, in response to India’s significant NPA crisis. They take a crucial step to address this crisis by proposing to classify NBFCs, including asset reconstruction companies (“ARCs”), as lenders, allowing them to be at par with banks vis-à-vis the identification of wilful defaulters and initiating penal action against them. This would incentivise the growth of ARCs in India with a favourable regulatory framework.

Nevertheless, the draft directions also raise certain concerns as regards their scope and implications. Firstly, while the RBI has attempted to satisfy the requirements of natural justice by providing an opportunity for the defaulters to make written representations and a personal hearing before the review committee, it retains the in-house mechanisms of banks to identify wilful defaulters.

Apart from concerns regarding this mechanism’s susceptibility to bias, one may question the role of courts in reviewing the decision of the review committee, considering the significant consequences that such classification attracts, implicating Article 19(1)(g) of the Constitution, as held in Jah Developers.

However, the Calcutta High Court, in Kejriwal Mining Pvt. Ltd. v Allahabad Bank, ruled that the classification as a “wilful defaulter” may only be overturned by a court under its writ jurisdiction on grounds of patent illegality, arbitrariness, bias, or abuse of process. This narrow jurisdiction effectively permits private commercial entities to make decisions, which consequently restrict fundamental rights under Article 19(1)(g) without any possibility of a substantive judicial review.

Secondly, by introducing the concept of associated entities (which are also barred from institutional finance) to the regime, the draft regulations make it more difficult for a liquidity-strapped wilfully defaulting company to be refinanced. When the defaulter is a company, the draft deems its promoters and whole-time directors also as wilful defaulters, making any other entity in which they are promoters or directors, associated entities.

Currently, the defaulting company, its promoters, and whole-time directors are barred from institutional finance, while the company is further barred from accessing capital markets (except by way of a rights issue or preferential allotment under SEBI’s regulation) and debt markets. Therefore, it is difficult for a liquidity-strapped defaulting company that is closely promoter-held to raise funds, as the promoters are barred from institutional finance.

Nevertheless, currently, re-financing is possible through other promoter-controlled entities, which have access to institutional finance. However, since the proposed directions bar associated entities from institutional finance, it would make it harder for such promoter-led entities to refinance a liquidity-strapped defaulting company. This may have the effect of prejudicing the interests of other shareholders in the wilfully defaulting company as it may struggle to raise adequate funds for its operations.

Finally, the proposed regulations give an expansive definition of associated entities. Any entity in which the wilful defaulter is a promoter or director is deemed to be an associated entity, without any distinction drawn between whole-time and non-whole-time directorships. This may have an unnecessarily wide effect on companies wherein the wilful defaulter may not even exercise control, in addition to the extant burden to remove such defaulters from their Board.

Current Trends

Challenges and Current Trends in Wilful Defaulters Norms.

Data from TransUnion Cibil indicates that banks are predicted to experience a notable increase in willful defaults. The Reserve Bank of India (RBI) put forth draught master directions in September.

According to data from credit information company TransUnion Cibil, from Rs 304,063 crore (14,899 accounts) in March 2022 to Rs 353,874 crore (involving 16,883 accounts) in March 2023, there were nearly Rs 50,000 crore more wilful defaulters. About 77% of all willful defaults can be attributed to SBI and nationalised banks.

1,921 willful default accounts totalling Rs 79,271 crore have been reported by the State Bank of India (SBI), Rs 41,353 crore by Punjab National Bank, Rs 35,623 crore by Union Bank, Rs 22,754 crore by Bank of Baroda, and Rs 24,192 crore by IDBI Bank.

As of March 2023, banks of all stripes had sued 36,150 non-performing accounts in an attempt to recoup Rs 9.26 lakh crore. When the RBI releases the final guidelines, a large number of these legacy accounts will probably be added to the category of wilful default. There were 14,202 willful default accounts totalling Rs 285,474 crore as of December 2021. There were 12,907 accounts totalling Rs 245,767 crore as of December 2020.

According to data from the Cibil website, as of December 2022, the State Bank of India (SBI) topped the list with 1,881 wilful default accounts for Rs 79,227 crore. PNB was next with Rs 38,333 crore (2,143 accounts), Union Bank of India with Rs 35,561 crore (1,747 accounts), IDBI Bank with Rs 23,601 crore (335 accounts), and Bank of Baroda with Rs 23,879 crore (2,203 accounts). With a total of Rs 292,865 crore, public sector banks are responsible for 85% of the wilful defaults.

Current Trend

As of March 31, 2021, there were 2,494 wilful defaulters, up from 2,208, as Finance Minister Nirmala Sitharaman told Parliament on Tuesday. According to RBI, written-off loans and non-performing assets (NPAs) totalled Rs 3,12,987 crore, the speaker stated in a written response to the Rajya Sabha. "PSBs reported 2,017 unique wilful defaulters as of March 31, 2019, 2,208 as of March 31, 2020, and 2,494 as of March 31, 2021, according to information provided by RBI.

The minister of finance added, "The RBI has informed us that, according to data reported by banks to the Central Repository of Information on Large Credits (CRILC), as of March 31, 2019, March 31, 2020, and March 31, 2021, the total funded amount outstanding of borrowers with a private sector code whose loans are classified as non-performing assets (NPAs) in the PSBs is Rs 5,73,202 crore, Rs 4,92,632 crore, and Rs 4,02,015 crore, respectively.

In response to an additional query, the minister of finance stated that public sector banks had written off Rs 1,31,894 crore in 2020–21 as opposed to Rs 1,75,876 crore in the year prior. The government's strategy of recognition, resolution, recapitalization, and reforms has resulted in a decrease in gross non-performing assets (NPAs) as a percentage of total assets, which stands at 9.11% as of March 31, 2021, down from 11.97% on March 31, 2015.

The total amount of wilful default accounts held by private banks was Rs 2,005.9 crore by Axis Bank, Rs 2,136.5 crore by ICICI Bank, and Rs 505.5 crore by HDFC Bank. As of December 2022, 1.822 such accounts for Rs 30,809 crore were reported by private banks (IDBI Bank excluded).

Rule Applicability

All regulated entities, including banks, non-bank lenders (such as housing finance companies), cooperative banks, regional rural banks, local area banks, and All India Financial Institutions (AIFI) such as NABARD, SIDBI, EXIM Bank, NHB, and NaBFID, are expected to be subject to the new regulations. However, by an RBI circular dated June 8, 2023, willful defaulters will be qualified for compromise settlements.

The Rajya Sabha was informed in August by the Finance Ministry that the top 50 deliberate defaulters owed banks and financial institutions a total of Rs 87,295 crore. The evading Mehul Choksi's Gitanjali Gems Limited, the ABG Shipyard Limited of Rishi Agarwal, REI Agro Limited, and Era Infra Engineering Limited are among these willful defaulters. The top 10 of these willful defaulters owe scheduled commercial banks an astounding Rs 40,825 crore (SCBs).

Minister of State for Finance Dr Bhagwat Karad claimed that the SCBs had written off an aggregate of Rs. 10,57,326 crore over the previous five years, citing the RBI's preliminary data for FY22–23. According to PTI, he stated, "The Reserve Bank of India (RBI) has apprised that the amount owed by top 50 wilful defaulters in SCBs was Rs 87,295 crore as on March 31, 2023." The largest deliberate defaulter is Gitanjali Gems, a fugitive company owned by Mehul Choksi that owes banks Rs 8,738 crore.

Era Infra Engineering Limited (Rs 5,750 crore), REI Agro Limited (Rs 5,148 crore), ABG Shipyard Limited (Rs 4,774 crore), and Concast Steel and Power Limited (Rs 4,774 crore) are the companies on the list after Gitanjali Gems (Rs 3,911 crore). Other willful defaulters include Frost International Limited (Rs 2,518 crore), Shri Lakshmi Cotsyn Limited (Rs 2,180 crore), Winsome Diamonds and Jewellery Limited (Rs 2,846 crore), Rotomac Global Private Limited (Rs 2,894 crore), and Zoom Developers Private Limited (Rs 2,066 crore).

As of March 31, 2021, there were 2,494 wilful defaulters, up from 2,208, as Finance Minister Nirmala Sitharaman told Parliament. According to RBI, written-off loans and non-performing assets (NPAs) totalled Rs 3,12,987 crore, the speaker stated in a written response to the Rajya Sabha. "PSBs reported 2,017 unique wilful defaulters as of March 31, 2019, 2,208 as of March 31, 2020, and 2,494 as of March 31, 2021, according to information provided by RBI.

The minister of finance added, "The RBI has informed us that, according to data reported by banks to the Central Repository of Information on Large Credits (CRILC), as of March 31, 2019, March 31, 2020, and March 31, 2021, the total funded amount outstanding of borrowers with a private sector code whose loans are classified as non-performing assets (NPAs) in the PSBs is Rs 5,73,202 crore, Rs 4,92,632 crore, and Rs 4,02,015 crore, respectively.

In response to an additional query, the minister of finance stated that public sector banks had written off Rs 1,31,894 crore in 2020–21 as opposed to Rs 1,75,876 crore in the year prior. As a consequence of the government's recognition, resolution, recapitalization, and reform strategy, the gross non-performing assets (NPAs) as a percentage of total assets have decreased, rising from 11.97% on March 31, 2015, to 9.11% as of March 31, 2021.

Suggestions

After the complete analysis of this research paper, certain recommendations or suggestions can be craved out, they are as follows-

• The law should be more preventive than reactive. The penalties for wilful default should be harsher to deter people from committing this crime.
• Banks need to be more vigilant and identify the problem of wilful default at an early stage. They can do this by developing a close network of businessmen and associations who can alert them about wrongdoings.
• Public sector banks should stand up against the pressure to lend money to wilful defaulters, directly or indirectly, on the recommendations of politicians.
• Banks should implement internal checks and balances to punish offenders and set a precedent.
• Lacunae in the laws, such as whether a zero per cent loan is considered financial debt.

Other facets of wilful default can be covered. The legal aspects of wilful defaulters in India are in the development phase and there are a few discrepancies under different provisions of laws. However, the government and the RBI are constantly working on it to address this issue. Banks and Financial Institutions need to be a bit more vigilant and take proactive measures and spread awareness to prevent wilful default, especially against those who use the loopholes.

Conclusion

Wilful defaulting is a critical issue that has led to a rise in non-performing assets (NPAs) and losses for banks and taxpayers. The problem has been exacerbated by high-profile cases of wilful defaulters who have fled the country. Steps taken by the Indian Government by enacting the Insolvency and Bankruptcy Code and cracking down on wilful defaulters through legal action need to be in a more stringent way.

Regulators and banks must offer loans to people with high chances of repayment along with accountability in case of default. The whistleblower's protection policy should be seriously dealt with along with speeding up recovery for wilful defaulters.

Overall, it must be imperative for the regulators and government to adhere to strict action against wilful defaulters. Increased accountability, transparency, and efficient legal mechanisms will help tackle the wilful defaulters.

The compromise settlement for wilful defaulters is a novel and innovative policy that aims to balance the interests of banks, borrowers and the economy as a whole. It has the potential to enhance the efficiency and effectiveness of NPA recovery and resolution, but it also poses some risks and challenges that need to be carefully managed. Its success will depend upon the implementation plan by RBI.

The results show that the majority of the wilful defaulters fall under specific industries like textile and wholesale trading that have poor governance and effectivity and are greatly at receiving ends.

The paper suggests that the majority of the firms before declaring themselves as wilful defaulter have shown poor financial performance in the last 4 years before declaring themselves as bankrupt. The financial institutions as well as banks should ensure the growth of the company and the fundamental structure such as Governance structure and its financial stability.

From the viewpoint of Legal Aspects, it can be concluded that:

• There is a discrepancy in the amount of the penalty for wilful default under different laws.
• Banks and other financial institutions (FIs) cannot grant additional funds and facilities to wilful defaulters for 5 years from the date they are listed as defaulters.
• Banks and FIs should initiate legal proceedings against wilful defaulters expeditiously.
• Banks and FIs should take proactive measures to change the management of wilful defaulters, if possible.
• Wilful defaulters should not be inducted onto the board of any company.
• Banks and FIs should complain to the Institute for Chartered Accountants in India (ICAI) if they find that the auditors of a wilful defaulter were negligent or deficient in their auditing. This information should also be shared with SEBI, the Ministry of Company Affairs (MCA), the Comptroller Auditor General (CAG), and other relevant market regulators.
• Criminal prosecution is warranted under the Indian Penal Code in case of wilful default with malicious intent.

References

[1] M.L.Tannan, Tannan’s Banking Law and Practice in India, 23rd Ed. 2010, Lexis Nexis Butterworths Wadhwa, Nagpur

[2] Insolvency and Bankruptcy Code, 2016

[3] The SARFAESI Act, 2002.

[4] The Companies Act, 2013.

[5]  Indian Penal Code, 1860.

[6] Kejriwal Mining Pvt. Ltd. v. Allahabad Bank, AIR 2020 Cal 416

[7] Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta & Ors., (2020) 8 SCC 531.

[8] Common Cause (A registered Society) v. Union of India & Anr, Civil No.291 of 1998

[9] State Bank of India v. Jah Developers Pvt. Ltd., (Arising out of Special Leave Petition (Civil) No. 8591 of 2016

[10] Reserve Bank of India v. Jayantilal N. Mistry, Transferred Case (Civil) No.91 of 2015

[11] Mahindra Bank v. Hindustan National Glass & Industries Ltd., (2013)7 SCC 369

[12] Sudarshan Overseas Ltd. v. Reserve Bank of India, (2009) 160 DLT 77

[13] Maheswary Ispat Ltd. v. State Bank Of Patiala, 2013 SCC Online (Cal) 19428

[14] Master Circular on Wilful Defaulters DBOD.No.CID.BC.3/20.16.003/2014-15 dated July 1, 2014.

[15] Jayadev, M., & Padma, N. (2020), Wilful defaulters of Indian banks: A first cut analysis, IIMB Management Review, 32(2), 129-142.

[16] Rangoonwala, N. (2019), The Legal Aspects of the Wilful Defaults in India: A Critical Study. International Journal of Banking, Risk & Insurance, 7(2).

[17] GM Sanjeev, Bankers' Perceptions on Causes of Bad Loans in Banks, Journal of Management Research, 2007