According to the recent announcement (Treatment of Wilful Defaulters and Large Defaulters) by the Reserve Bank of India (RBI), financial institutions are required to thoroughly evaluate all factors pertaining to deliberate non-payment of loans (NPA) above Rs 25 lakh. Furthermore, they must identify individuals who intentionally default on their loan obligations within a period of six months after the loan has been classified as a non-performing asset. The regulatory body published preliminary guidelines pertaining to intentional and significant defaulters. Non-banking financial companies and cooperative banks have been granted the ability to identify themselves.
A wilful defaulter refers to an individual who has intentionally failed to fulfil their financial obligations as a borrower or guarantor, without any external constraints. In such cases, the outstanding amount of the default is equal to or exceeds Rs 25 lakh. A significant defaulter is defined as an individual or entity whose default amount exceeds Rs 1 crore. In order to determine the threshold of Rs 1 crore, it is necessary to incorporate any unapplied interest, if applicable.
According to the draft norms, if an account is classified as a wilful defaulter and has been resolved through either the Insolvency and Bankruptcy Code or the RBI’s regulations, leading to a change in the management and control of the entity or business enterprise, it is recommended that the name of such a defaulter be eliminated from the list. The removal of a wilful defaulter’s name from the list is contingent upon the borrower fulfilling their financial obligations by making the necessary payment, subsequent to entering into a settlement agreement with the lender. It is imperative that the name not be omitted in the case of partial payment.
The resolution reached with the intentional defaulter will adhere to the lender’s policy as approved by the board. The norms stipulate that the policy should encompass many aspects, such as guidelines for assessing staff accountability, procedures for reporting compromises or settlements to the board, and the possibility of requiring greater upfront payments, among others. The compromise settlement will not affect the ongoing legal processes, including criminal proceedings against the intentional defaulter. The Reserve Bank has requested recommendations regarding the draft master direction by the deadline of October 31.
The banking industry has written down loans totalling Rs 10.57 lakh crore over the past five years. While the NPA of banks has decreased over the past few years, the primary reason for this is the write-off of bad loans. In March 2023, NPAs reached a 10-year low of 3.9 per cent due in large part to write-offs. Due to this, the bank’s balance sheet is pristine. Due to banks’ loan write-offs, Gross NPAs will decline from Rs 10.21 lakh crore in FY18 to Rs 5.55 lakh crore by March 2023, a decrease of Rs 5.55 lakh crore. According to data from the RBI, banks have written off a staggering amount of over Rs 15,31,455 crore since the 2012-13 fiscal year.
The bank writes off a loan when the borrower has defaulted on the loan and the likelihood of recovery is extremely low. The bank then removes the NPA loan from the assets section and records the amount as a loss. In addition, they must provide provisions. Experts frown on this practice, but banks routinely use it as part of their tax management clean-up process. Beneficiaries are almost always some of our most egregious industrialist defaulters. After a loan has been written off, banks are required to continue pursuing various options to recover the loan. However, according to the RBI response, banks recovered only Rs 1,09,186 crore from Rs 5,86,891 crore in loan write-offs in the last three years, indicating that they could only recover 18.60 per cent of the write-offs during that time period. It is to be noted here that if the amount of write-off is added, then the total non-performing asset (NPA) will go up to 7.47 per cent, which banks are currently showing up to 3.9 per cent.
A freebie of RBI
Everyone in the nation is impacted by the excessive loss to the banks because the money deposited there belongs to the country’s citizens. According to RBI data, NPA write-offs in SCBs (including wilful defaulters) were 63,000 crores during FY2005-14, but they skyrocketed to 12.3 lakh crore between FY15 and FY22. The increase from FY15 to FY22 is largely attributable to the previous UPA’s overzealous loan sanctions and evergreening policies. Banks and businesses often use restructuring as a way to keep reporting their non-performing assets at low levels. ‘Evergreening loans’ is the practice of giving more loans to a borrower who is about to stop paying so that the loan stays on the books as being paid.
Between 2000 and 2014, companies could choose more flexible ways to restructure, which led to many of them getting new loans from banks to keep their loan portfolios going. Even though the bankruptcy code has made it harder to keep a business going forever, the rate of recovery is still very low. According to a Rajya Sabha answer from March 28, 2023, the “recovery” of NPAs written was only 16.6 per cent from FY18 to FY22.
Banking frauds have increased 17 times, from Rs 34,993 crore between 2005-14 to Rs 5.89 lakh crore in 2015-23. According to the RBI’s ‘Financial Stability Report (FSR)’ which came out on June 28, 2023, SCBs’ gross non-performing assets (GNPA) ratio continued its downtrend and fell to a 10-year low of 3.9 per cent in March 2023.
According to the report, write-offs by public sector banks increased from Rs 7,187 crore in 2013 to Rs 119,713 crore in 2022, SBI has written off the most money among these public sector banks in the past ten years, amounting to Rs 297,196 crore. Bank of Baroda comes in second place with Rs 75,429 billion, followed by PNB with Rs 92,511 billion and Bank of India with Rs 53,961 billion.
By March 2022, private banks had written off a total of Rs 53,087.03 crore, up from Rs 4,115.02 crore in 2013. In FY21-22, total write-offs by public and private sector banks totalled Rs 1,72,800 crore, far exceeding the amount allocated to any of the three key social sectors, namely MGNREGA, health, or education in FY23-24. The Modi government has so far given Rs 2.76 lakh crore for the recapitalisation of public sector banks.
Major Reasons for Bad Loans
In India, deliberate defaults are defined by inadequate evaluation prior to loan approval and a lack of monitoring. The banks’ net interest margin begins to decline as a result of the high NPA, and their operating costs rise steadily. To cover these costs, the banks raise the convenience fee they charge their smaller clients.
‘Management’, ‘Outsider’, ‘Insider’, and ‘Insider and Outsider’ (jointly) are the four categories into which frauds in the banking industry can be divided. Operational mistakes are the cause of all scams, whether they are internal or external. According to Deloitte’s research, insufficient due diligence before disbursement (21 per cent) and limited asset monitoring after disbursement (38 per cent) were the main causes of stressed assets and NPAs, respectively.
Corrective measures and way forward
Banks must be careful while lending as bad loans increase NPAs. Chartered Accountants must be regulated to reduce bank NPAs. Indian companies with large foreign loans should be cautiously lent by banks. Banks’ internal and external audit systems need urgent improvement. Senior officers make Credit Sanctioning Committee decisions, but junior officers are often blamed for defaults. Thus, senior officers must be held accountable. Loan department staff turnover is crucial. Public sector banks should establish an internal rating agency to rigorously evaluate large projects before lending. To monitor business project early warning signals, a good MIS is needed.
RBI needs human and technical resources to supervise forensic audits. AI-monitored financial transactions can greatly reduce financial fraud. Digitisation beyond a certain point may be misguided because artificial intelligence only considers quantitative data. The branch’s input on borrowers’ backgrounds and other ground realities is crucial to risk assessment.
India should improve debt recovery instead of writing off large corporate bad loans. Today, there is a need to make drastic changes in the bank credit structure, as well as reform from the branches to the roots. We need to learn from Islamic banking, under which the bank does not give loans but instead buys the required assets for the willing borrower. It is exactly like this where the food is given directly to the beggar so that he does not spend the alms in drinking alcohol.
The writer is Associate Professor, Atal Bihari Vajpayee School of Management and Entrepreneurship, JNU, New Delhi and the author of ‘Changing Scenario of Indian Banking Industry’. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect News18’s views.
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