25 Sep RBI Guidelines on Willful Defaulters
This article covers “Daily Current Affairs”, and the Topic details “ RBI Guidelines on Willful Defaulters ”. This Topic has relevance in the Economy section of the UPSC CSE exam.
For Prelims:
About Willful Defaulters?
GS 3: Economy
Factors Responsible for High Number of Defaults?
Why in the news:
The Reserve Bank of India (RBI) has issued a draft master didirection on the treatment of wilful defaulters
About Guidelines:
The Reserve Bank of India (RBI) has put forth several amendments to its guidelines concerning the classification of “wilful defaulters” and the actions that should be taken against them :
- Immediate Classification: Lenders are now required to categorize a borrower as a “wilful defaulter” promptly within six months of their account being designated as a non-performing asset (NPA). This represents a significant change as there was previously no specific timeframe for identifying such borrowers, ensuring a more timely assessment of wilful default.
- Defining Wilful Default: The RBI defines wilful defaulters as borrowers or guarantors who have the financial capacity to repay the bank’s dues but choose not to do so or divert bank funds. The minimum outstanding amount for a wilful defaulter is set at Rs 25 lakh and above, providing a clear definition of who falls into this category.
- Identification Committee: An Identification Committee, established by lenders, will be responsible for evaluating the evidence of wilful default and determining whether a borrower qualifies as a wilful defaulter. This committee ensures a fair and objective assessment process.
- Publication of Photographs: If lenders opt to publish photographs of wilful defaulters, they must establish a non-discriminatory board-approved policy outlining the criteria for such publication. This safeguards against unfair or biased publication practices.
- Credit Facility Restrictions: No lender can extend additional credit facilities to a wilful defaulter or any entity associated with them for up to one year after their name is removed from the List of Wilful Defaulters (LWD). This prevents wilful defaulters from obtaining additional credit both during and after their default status.
- New Ventures Restriction: Following their removal from the LWD, wilful defaulters and related entities are subject to a five-year restriction on obtaining credit facilities for launching new ventures. This prevents them from starting new businesses or taking on additional financial commitments.
- Restructuring Limitation: Wilful defaulters are ineligible for credit facility restructuring, meaning they cannot renegotiate their existing debt to make it more manageable.
- Guarantor Liability: Lenders can take action against the guarantor without first exhausting remedies against the primary debtor in the event of a default. The guarantor’s liability is immediate, and non-compliance with the lender’s demands may lead to their classification as a wilful defaulter, holding guarantors accountable for guaranteed loans.
- Compromise Settlement: Any account listed in the List of Wilful Defaulters can only be removed from the list once the borrower has fully repaid the compromised amount, ensuring that compromise settlements are honored and settled in full.
- Credit Facility Transfer: Lenders must investigate potential wilful default scenarios before transferring credit facilities to other lenders or asset reconstruction companies (ARCs), preventing the transfer of debt without first determining if wilful default was involved.
The RBI has invited feedback on these proposed changes from various stakeholders, with the comment deadline set for October 31. These proposed amendments aim to strengthen the framework for addressing wilful defaulters and provide transparency regarding the procedures and consequences associated with such cases.
Factors Responsible for High number of Defaults:
The current situation of defaults and, consequently high levels of Non-Performing Assets, which are eroding the stability of the banking sector, can be attributed to a set of structural weaknesses:
- Poor Banking Practices: Inadequate banking practices have played a significant role in this scenario.
- Discretionary Authority of Banking Officials: The discretionary powers vested in banking officials have also contributed to the problem.
- Influence from Powerful Industrial Groups: The influence wielded by influential industrial conglomerates has exerted additional pressure, often stemming from political circles, on banks.
- Intense Competition Among Banks: The intense competition among banks has led to the issuance of unsecured loans, which has become a cause for concern.
These factors collectively result in banks extending substantial loans without conducting thorough due diligence or obtaining adequate collateral.
Non-Performing Assets (NPAs)
- Definition of NPAs: NPAs encompass loans or advances where borrowers have fallen behind on their scheduled principal or interest payments, exceeding a specified timeframe, typically 90 days.
- Asset Status for Banks: Loans serve as assets for banks, generating substantial interest income. When borrowers, be they individuals or businesses, fail to meet interest payments, these assets lose their income-generating status and become “non-performing” from the bank’s perspective.
- RBI’s Criteria: The Reserve Bank of India (RBI) characterizes NPAs as assets that no longer contribute to a bank’s income.
- Disclosure Obligations: Banks are mandated to publicly disclose their NPA figures and regularly report them to the RBI.
- Classification of NPAs: In accordance with RBI directives, NPAs are classified into three distinct categories:
- Substandard Assets: Those holding NPA status for up to 12 months.
- Doubtful Assets: Assets that have maintained substandard status for 12 months.
- Loss Assets: Assets with minimal recovery potential, deemed uncollectible and unfit for classification as bankable assets.
Source:business-standard.com/finance/news/wilful-defaulter-must-be-identified-within-six-months-after-npa-tag-123092101223_1.html
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Q.1 Consider the following statements regarding Willfull defaulters:
- Only borrowers and not Guarantors can be classified as Willful defaulters.
- The individual banks classify a borrower as willful defaulters and not the RBI.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Q.2 Consider the following statements regarding Non-Performing Assets (NPAs):
- Substandard Assets are those holding NPA status for up to 6 months
- Loss Assets are those that have maintained substandard status for 12 months.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Q.3 “What measures can the government and financial regulatory authorities implement to effectively address the issue of willful defaulters in the banking sector, ensuring the recovery of bad loans and maintaining the stability of the financial system?”
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